For three decades, investors have moved assets from Japan, associated with an aging population, to emerging Asian markets, which are subject to a booming demographic. To counter the effects of unfavourable demographics on the labour market and thus the country’s growth,
Abenomics has inspired fundamental changes. According to Mitsuhiro Yuasa, director of Tokyo-based Rheos Capital Works, the emergence of new technologies will contribute to economic growth.
Changes as a driver of GDP
To address the limited work force, which hinders the growth momentum, the Japanese authorities are considering unprecedented solutions such as opening up the labour market to foreign workers and raising the retirement age. Yuasa comments that “The [labour] participation [rate] of women exceeds 70%, a higher rate than in the United States”. In Yuasa’s opinion, the new flexibility of the labour market is also favourable to inflation: “In order to retain their employees, companies will have to increase wages.”
In contrast, private equity and productivity – the other two contributors to GDP – are so far underutilised. “Companies have a lot of cash available and the problem of non-performing loans has been solved. Although they have learned to improve their productivity, a lot remains to be done in this area” says Yuasa.
In addition, technological growth will count as the fourth growth vector in Yuasa’s opinion, who explains that “The government has launched the digitalisation trend that makes processes more efficient. Companies across the country have followed and this will have a significant impact on GDP”. The 5G technology will be implemented in 2020 for the automatic navigation of public transport. “Digitalisation will be essential to tackle the shortage of the workforce because it will allow human resources to be devoted to other areas” says Yuasa who focusses on the theme of digitalisation through investing in Net One System, which provides internet and 5G services to public services and private companies.
Small and mid-cap companies benefit from a strong vision
From 2003 to 2012, Japan’s large cap stocks were particularly volatile, while over the same period 66% of listed Japanese stocks – mainly small and mid caps outside the financial sector – offered an average return of 110%.
“Ten years ago we bought Jin Co Ltd, which produces optical glasses. Its founder had a strong vision. Since then, the stock price has multiplied by 60, with investors still willing to pay a premium to acquire it” says Yuasa. For him, these types of companies, led by true founders, stand out in the inefficient market of small and medium caps. According to Yuasa “You have to understand the Values and Missions of companies. Successful investing requires time. This is particularly the case for growing companies that are part of a long-term process.”
The downsizing of the cross-shareholding structure, which aims at a better allocation of capital, has improved the profitability of Japanese companies. “Companies have realised that they need to focus on their ROE to attract foreign investors” says Yuasa. Although the trade war has made Japanese companies more cautious, they have plenty of cash available. “We are targeting growing companies that use their cash flow efficiently” adds Yuasa. In its selection process, Rheos Capital Works uses a proprietary quantitative filter that consists of a combination of valuation, momentum and technical analysis criteria. The team of analysts, consisting of 10 people, will then analyse companies to better understand their development and value the securities that make up the portfolio.
With $ 8.4 billion assets under management, Rheos Capital Works manages the Strategic Japan Opportunities Fund, a Dublin-domiciled UCITS fund, for European investors in partnership with E.I. Sturdza Investment Funds. Rheos has also been an external manager of the Norwegian Sovereign Fund (Norges Bank Investment Management) since 2008.