Page 6 - DIY Investor Magazine | Issue 29

BRIGHTER OUTLOOK FOR JAPANESE STOCKS?
Nicholas Price, portfolio manager of Fidelity Japan Trust PLC, discusses why he maintains a positive outlook for Japanese stocks. In particular, he outlines why he expects the Japanese market to be driven by strong fundamentals and positive corporate earnings surprises.
While new Covid-19 variants clearly pose near-term risks, we believe that the continued monetary and fiscal stimulus as well as the gradual vaccine rollout are positive for the global growth outlook and should be supportive of Japanese equities.
A number of themes present themselves. Certainly, clean energy and environmental efficiency are areas where Japan has some very competitive companies that can supply solutions to meet the regulatory and productivity needs of customers globally. Covid-19 has also accelerated trends in e-commerce and digitalisation. As profits recover, companies will prioritise those areas.
One such example held in the Trust is Mitsui High-tec, a major player in the global motor core market, an essential component of power-train motors in electrical vehicles (EV) and hybrid vehicles.
In the internet space, Coconala is a unique online C2C freelancing platform that enables users to trade knowledge, skills and experience. We first invested in the company as an unlisted security in 2019, recognising it as a beneficiary of the many structural changes occurring in Japan’s labour market, and attracted by its high and sustainable growth rates, as well as the high operating leverage of its business.
Coconala recently had a strong debut on the Tokyo Stock Exchange and the value of the portfolio’s holding increased more than threefold.
OPPORTUNITIES IN ESG
Globally, the uncertainty wrought by Covid-19 has shone a light on sustainability- and Japan is no exception. Although Japanese companies generally have lower sustainability scores than their European counterparts, we believe this is not due to any fundamental differences in strategy - but more to do with cultural reasons around disclosure practices and language.
By working closely with our sustainable investing team
on the ground in Japan, we are able to identify laggard companies that are implementing real change and moving
up the governance scale. As these companies improve disclosure, ESG ratings should catch up and the market should adjust valuations accordingly. For investors, this creates an opportunity to benefit from the correction.
As an example of our ESG-related activities, I would highlight NOF Corp, a diversified chemicals company that we hold in the Trust, with which we actively engaged through the year on the themes of climate change, waste and pollution, and governance.
We engaged with the company at the start of 2020, focusing on its low ESG rating and potential improvement measures. We highlighted that the quality of its business and products was not fully reflected in its share price due to ESG-related issues.
‘CLEAN ENERGY AND ENVIRONMENTAL EFFICIENCY ARE AREAS WHERE JAPAN HAS SOME VERY COMPETITIVE COMPANIES’
‘AS THESE COMPANIES IMPROVE DISCLOSURE, ESG RATINGS SHOULD CATCH UP AND THE MARKET SHOULD ADJUST VALUATIONS ACCORDINGLY’
DIY Investor Magazine | Jun 2021 6