The January 2023 IMF World Economic Outlook update has reiterated, once again, the relative appeal of Japan compared with the other major developed economies. In particular, the IMF is forecasting faster 2023 economic growth for Japan. Central banks expect lower CPI, and, as a result, one may expect less pressure to raise interest rates. We have repeatedly emphasised how Fidelity Japan Trust plc (LON:FJV) adds value through its stock selection (and our last note, Opportunities from the mother of invention, highlighted how above-average innovation in Japan was an advantage to this), but a positive relative economic environment also provides following tailwinds, and helps investor sentiment.
- Economic outlook: The IMF’s January World Economic Outlook update was again favourable for Japan, showing faster real GDP growth in 2023 (at 1.8%, more than twice the G7 average of 0.8%). Inflation expectations are less than half the advanced economies’ average, and interest rates, while rising, are a fraction of peer levels.
- FJV’s unique value add: FJV’s approach is “growth at a reasonable price”. Companies growing because of innovation have a natural fit to the first element. FJV’s long, local presence gives it advantages over global investors, while its deep, global analytical reach is a competitive advantage over smaller, national ones.
- Valuation: 92% of investments are listed in active markets. While some may have a degree of illiquidity, the NAV is “real”. The discount of 7% is above the average of recent levels, but it is slightly above that of its peers, whom FJV has materially outperformed over five years. FJV is run for capital growth.
- Risks: FJV has seen periods of short-term underperformance, when its investment style has been out of favour – typically, when the market has undergone a sharp factor rotation – but recovery has usually been swift. 2022 performance may affect sentiment for a while. There are also some Japan sentiment issues.
- Investment summary: FJV has outperformed its peers, benchmarks and UK indices, with a distinctive and active investment approach. Its companies show faster-than-average EBITDA growth (2023E ca.1.3x and 2024E 1.8x the market), and have higher RoEs and RoICs (both around one third above the market). It invests for “growth at a reasonable price” (GARP) – so company valuations are usually higher. With an active approach, investors are buying FJV’s investment process, not its portfolio on a given day. Japan offers tech-enabled growth and structural reforms, and it is levered to global trade. Its approach can be out of favour, but, under the manager’s tenure, underperformance periods have been short.