Japanese companies have faced multiple headwinds over recent times as uncertainty over US-China trade frictions and the impact on the global economy have clouded the outlook for corporate earnings. While we have seen something of a recovery in markets year-to-date - with the broad TOPIX Index rising by double digits in GBP terms over the first 10 months of the year - it is notable that the Japanese market has lagged its global peers (excluding the UK) over the last 12 months.
Periods of market weakness have created some interesting opportunities among individual stocks and sectors, particularly in areas relating to technology, where there have been opportunities to capitalise on disconnects between near-term sentiment and mid-term fundamentals.
Trade frictions coincided with a downturn in the technology cycle, and we saw, for example, semiconductor stocks falling by 50% relative from the peak in late 2017. As we come out of a negative inventory and supply cycle and memory prices stabilise (NAND in the second half of 2019 and DRAM in the first half of 2020), earnings should bottom out in the next quarter or two.
Looking into 2020, we can expect a reacceleration of demand for memory semiconductors, driven by content growth from the global rollout of 5G smartphones and a recovery in spending by data centres. Memory supply-demand will tighten as new capacity additions had been controlled over the past one to two years.
In this environment, market dynamics combined with overly negative sentiment have created opportunities to buy companies at trough valuations. Notable examples held in Fidelity Japan Trust PLC include Tokyo Electron, which makes semiconductor production equipment, and Screen Holdings, which specialises in manufacturing and cleaning systems for semiconductors and flat panel displays. Both of these companies rank among the trust's largest active stock weights.
As the inventory cycle of electronic components and devices bottoms out, a number of globally competitive companies are well positioned to capture the structural growth for automotive semiconductors. For example, Renesas Electronics (the largest microcontroller semiconductor company in Japan) and Rohm (a global leader in power management ICs and devices) stand to benefit as content per car increases alongside the development of CASE (connected/autonomous/shared/ electric) technologies.
Meanwhile, the advent of 5G handsets will create a new content cycle for globally competitive component makers even if the overall economic environment is not accelerating.
Click here to read more about investment trust trends in the latest edition of Investment Trust Quarterly - including more from Fidelity on Japan's next tech leaders and also on lessons for 2020 in UK equities.
The value of investments can go down as well as up and you may not get back the amount you invested. Past performance is not a reliable indicator of future returns. Overseas investments are subject to currency fluctuations. This trust invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
The article is issued by Financial Administration Services Limited, authorised and regulated in the UK by the Financial Conduct Authority. Fidelity, Fidelity International, The Fidelity International logo and F symbol are trademarks of FIL limited. UKM1219/25058/SSO/NA