Fidelity Japan Trust plc (LON:FJV) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You called your recent report on Fidelity Japan Trust ‘Favourable G7 2023 economic outlook for Japan’. What can you tell us about it?
A1: 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 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 tail winds, and helps investor sentiment.
Q2: So, can you tell us a bit about the outlook?
A2: Our note included a chart showing that Japanese Real GDP forecasts by the IMF in 2023 are well over twice the G7 average. This is combined with lower inflation (most forecasters are predicting 1.5% to 2% for Japan, around half the G7 average). With this economic outlook, interest rates in Japan, while rising, are just a fraction of increases seen elsewhere, all of which combine to give a very positive relative economic outlook compared with the G7 average.
Q3: What is the manager saying about it?
A3: On 6 December 2022, the manager, Nicholas Price, published his review, entitled ‘Outlook is bright for Japan’. The key points were:
- “Pent-up demand among both consumers and businesses will continue to underpin growth, and we have started to see a pickup in the number of inbound tourists taking advantage of the weak yen.
- While we continue to find a lot of ideas among mid/small caps, we are also seeing attractive opportunities in the unlisted sector.
- By working closely with our sustainable investing team and maintaining an active dialogue with investee companies, we aim to continually improve the sustainability of their businesses, which should also enhance their performance as investments.
With the global economic outlook darkening, Japan is an outlier – showing a degree of resilience as Covid-19 restrictions ease and the economy finally reopens. Unlike many other countries, the economic policies of the Japanese government and central bank are a positive mix of fiscal expansion and monetary easing.” These are all sentiments that our analysis agrees with.
Q4: So how does Fidelity Japan Trust access this opportunity?
A4: First, the Trust is about stock selection rather than just tagging onto the favourable environment, so picking stocks is key.
Secondly, it is capturing the full value opportunity by investing in late-stage, pre-IPO, unlisted companies, as well as listed ones. FJV is a supportive investor, not a private equity investor. With more companies staying private for longer, there is significant value to be found in this stage of a company’s life.
Finally, there are the competitive advantages of the Fidelity platform – notably, a large, local presence gives an advantage over global players, access to their global network gives an advantage over national investors, and research gives an advantage in the under-researched market.
The trust’s approach is “growth at a reasonable price”. Companies growing because of innovation have a natural fit to the first element, and we believe they are a material factor in the trust delivering superior long-term performance.