Growth or value. Weighing the merits of these 2 competing investment styles is like choosing between Superman and Batman. You want both. Fidelity
Of course, the likes of Fidelity will happily sell you a “blended” fund that invests in both growth stocks and value stocks. You get the best of both worlds, right? Or, more likely, you get market returns.
Regardless of the short-term (hopefully) market moves, we remain focused on companies that are exposed to disruptive innovation in Japan. If that sounds like you.....read on.
The long-awaited rotation from growth to value has arrived.
Market sentiment and price action has shifted dramatically since the start of the year. Getting technical for a minute, factor returns in Japan have completely reversed. Value (low price-to-sales, low price-to-book) stocks have returned almost +20% this year. Growth (expected sales growth) stocks have declined -7%. Momentum (stocks that did well over past year) has been the worst performer, down -18%.
There are many reasons why value can do well.
To say that the past one year has been unusual is an understatement. The Covid pandemic had a pronounced impact on the economy and markets. The sales and earnings of many consumer facing businesses have been decimated. So too have the balance sheets of those which rely on fixed assets (think planes and trains). Conversely, companies that enabled a more “remote” lifestyle fared rather well. Not surprisingly then, as the economy gets back on its feet post Covid, those trends should reverse. For many value stocks, especially those with high operating leverage, the earnings outlook will improve rapidly. For growth investors, there is the double whammy of a relatively weaker earnings outlook and valuation compression. With governments around the world eager to get their economies firing again, we are seeing record levels of fiscal stimulus. That’s good, but if it leads to higher rates, it tends to have negative effects on longer duration cash flows. The valuation of the high-flying “Covid-winners” had become extreme and will unwind to some extent.
Transforming Japan.
It is well known that Japan has fallen behind the rest of the world in digital competitiveness. Despite being the third largest economy, it ranks only 27th in digital competitiveness. The government is aware of the this too and one of Prime Minister Suga’s first acts was to set up a Digital Agency to lead Japan’s digital transformation.
The digital agency should become a strong organization which can function as a powerful control tower, with highly talented people gathering from both the public and private sectors, to lead the digitalization of the society as a whole (PM Suga)
A recent Mckinsey study highlighted that Japan could add up to $735b (15% of GDP) to its economy by 2030 through a series of bold moves to accelerate digital transformation. The paper recommended a multi-faceted approach from growing the digital talent pool, to transforming core industries with AI, to investing in next generation start-ups. That is the kind of environment where we expect to find exciting growth opportunities. So, while there are many valid arguments why value could outperform growth in 2021, we continue to hunt for Supermen.
🗞 NUGGETS 🗞
One Team. METI and other companies all pitching in to help Renesas recover quickly from its fire. Chips and autos are two of Japan’s top exports. Japan Times
Safety first. Panasonic operates Security Operation Centres for factories to protect networked equipment from cyberattacks. The company is now teaming up with McAfee to protect autonomous cars from cyberattacks. Automotive World
Digital natives. Minna Bank will open its virtual doors in May. The digital only bank will run its core banking system on Google Cloud. BusinessWire
Silent Customer. Japanese start-up Karakuri has developed an AI tool to predict behaviour on Ecommerce sites, to guard against “customers who give up” before buying something. PR Times
Green dreams. Japan’s largest refiner, ENEOS (JXTG) will conduct a feasibility study with Aramco to produce hydrogen from natural gas. The plan is to fuel the power generation for its refineries with Hydrogen. S&P Global
📈 TOP MOVERS 📈
This week, just under 30% of the 140 stocks in our Japan Innovation & Disruption universe rose. The TSE Mothers Index declined -2.6% for the week, before rebounding +3% on Friday, the first up day in five.
🔻-6% Freee (4478, Mkt Cap $4.2bn), cloud accounting software provider, had a volatile week after announcing on Monday a growth focused ¥40b share sale. The deal placed on Thursday, -9% below the announcement date, but rose +14% on Friday as investors bought into the growth story.