Amidst increasing global challenges, an investment business examines opportunities for making money in Japan.

As Japanese firms continue to consolidate, Rupert Kimber, a partner of Quaero Capital, highlights the long-term investment opportunities available in the region.

Talking exclusively to WealthBriefingAsia, Kimber said: “There are still many fragmented companies in Japan and the scope for consolidation is enormous. The corporate landscape is going to change over the next five to 10 years and with that there are tremendous investment opportunities, if you stay around to harvest it.”

He pointed the trigger in 2009 when restructuring and consolidation began.

“Many firms are still undervalued in Japan,” he said. “Private equity firms are also excited about the Japanese market which remains largely untapped and are buying up listed companies,” he added. He cited Japanese firm Toshiba which is currently being eyed by private equity firms.

He also highlighted how Japan is at the forefront of high-end technology, with automated production lines. It has a strong semiconductor industry, which is crucial for the manufacture of electric vehicles. It has a big nuclear capability too, making it less susceptible to the energy crisis provoked by the war between Russia and Ukraine, he said.

An increasing number of companies, particularly in the food industry, are nevertheless passing prices on and helping to contribute to Japan’s rising inflation, which remains low by international comparisons, the firm said. Japan will not be immune to the geopolitical two-pronged threat of Russia and China reeling from the Ukranian conflict on the draconian Covid policy of Xi Jinping's administration, it added. 

Since Japan's equity and real estate markets crashed in the late 1980s, the country has been through a number of "false dawns" amidst hopes that the country would recover from sluggish/zero growth. About a decade ago, the country embarked on a variety of fiscal, monetary and supply-side changes which appear to have won through. One of the ironies is that economists argued that Japan needed some inflation after a period of deflation. With global inflation rates rising, that development has come to pass. (See an example of a previous commentary on the country, here.)

Transformation
Quaero Capital's Kimber went on to emphasise how Japan is undergoing a digital transformation to increase white collar labour productivity. Covid has helped accelerate this trend away from personal contact, he said, which will benefit investment opportunities. Japan's Prime Minister Fumio Kishida has also just reaffirmed his commitment to supporting the growth of new technologies as part of the government's support package, the firm added.

Kimber, who has been involved in Japanese equities since 1986, is a lead manager of the Quaero Capital Funds (Lux) – Taiko Japan which aims to achieve long-term capital growth by investing in listed Japanese companies. Launched in 2020, the fund saw positive returns in 2021 ahead of the index, and seeks to profit from investment opportunities by identifying under-valued securities. It has a concentrated portfolio, typically holding between 20 and 30 different positions at any given time but with diversification across multiple sectors.

Launched in 1996, Quaero’s Atlantis Japan Growth Fund is a Guernsey-domiciled, London-listed investment trust, seeing positive results over a five-year period and outperforming the index, despite poor performance over the last 18 months. In April, the fund declined by 6.22 per cent year-on-year a total return basis versus the Topix benchmark’s 4.37 per cent decline in sterling terms. This was in an environment of monetary tightening in the US, rising global interest rates, inflation and a depreciating yen, all exacerbated by the war in Ukraine and Covid lockdowns in China, the firm explained in a statement. Nevertheless, the fund  aims to achieve long-term growth, with emphasis on undervalued, fast-growing companies. Key areas of focus include healthcare, technology, workplace reform and infrastructure, with top holdings including software-testing leader Shift and semiconductor gas management provider Japan Material.   

Founded in 2005 in Geneva, Quaero Capital LLP is a specialist fund management firm with 2.8 billion euros ($2.92 billion) assets under management as at 30 April 2022.