Industry Voice: Three ways to invest in Japanese growth

Kenichi Amaki, Portfolio Manager, Matthews Asia

The sustained growth of Asia and Japan's increasing integration with the rest of Asia is what makes Japan's equity markets attractive. Never in its history has Japan been more integrated with the rest of the region. It has long been home to world-leading companies, companies with globally recognized brands, and innovative technologies - and those companies are starting to tap the Asian economies for growth. A decade ago, Japanese products were simply too expensive for the average Asian consumer but over time, household incomes in Asia have continued to grow driven by productivity improvements. Now the price points are starting to meet.

Miscast by many investors as a "large-cap value" market, active Japan investors can find many long-term growth opportunities across the market-cap spectrum. I tend to find growth in three distinct groups:

The Global Leaders. These are companies with globally recognized brand, leading technology, product or service. Typically these companies are tapping growth outside of Japan in both developed and emerging markets.
The Asia Growers. Companies that derive a significant or growing portion of revenues from Asia. These companies are capitalizing on the growth of Asia's middle class. These firms may export, trade, or locate business operations throughout this dynamic region.
Domestic Niche. Japan is a large economy in itself. For an entrepreneur with a unique idea, service, or business model, there is sufficient headroom to build and grow a business.

The small cap space offers particularly compelling investment opportunities: Approximately 60% of the roughly 1500 universe of small cap companies have less than two analysts covering them. Many of these stocks are strong and sustainable growing businesses at reasonable multiples relative to their growth and peers but remain under-covered and under-appreciated. With a long-term investment horizon, these holdings may develop into market leaders in their respective industries.

Regardless of the size of company, reform initiatives to improve Japanese corporate governance practices are slowly starting to bear fruit. We are seeing that first in the form of increased shareholder returns, either through dividends or share buybacks. But the reforms aren't simply about paying out more. Ultimately, corporate managers need to make better capital allocation decisions, become better stewards of capital. Change won't happen overnight but we are starting to see moves in the right direction. To me, these factors make Japanese equities an attractive place to invest.

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_{The views and information discussed in this article are as of the date of publication, are subject to change and may not reflect the writers' current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of or any securities or any sectors mentioned herein. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information.}

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