Legg Mason’s Shiozumi – opportunities in Japan ahead of anticipated economic revitalisation

Investors should consider taking advantage of Japan’s recent lacklustre showing versus other equity markets ahead of anticipated further revitalisation of its economy, Hideo Shiozumi, manager of the £680m Legg Mason IF Japan Equity Fund has said.
Japan’s leading equity market index, the Nikkei 225, has lagged its peers in other developed markets this year. This is despite a promising economic backdrop in Japan during the second quarter of 2017, including strong GDP and consumption growth.
Shiozumi has noted that fears over the potential for a bout of renewed yen strength combined with concerns regarding the ability of Japan’s population to escape its deflationary mind-set, have weighed on sentiment.
“Despite favourable profit growth and improving economic indicators, the Japanese stock market has lagged other equity markets,” Shiozumi said.
“However, we continue to believe that the Japanese stock market is at the second stage of its long duration bull market. While some scepticism exists about Japan’s long-run recovery and exit from deflation, we believe investors should increase their positions in Japan while its stock market is still lagging other equity markets, and before optimism prevails.”
In terms of areas of interest within Japan, Shiozumi is focused on the future for Japan’s economy.
He says rather than focusing on sectors such as export, where the direction of the yen will have an impact on returns, they should concentrate on areas being transformed for the long-term by trends impacting the Japanese economy.
“What is most important when investing in the Japanese stock market is to know that Japan is faced with an ageing society and a declining population,” he said.
“Rather than investing in conventional manufacturing and technology sectors, investment in Japan should be driven by an underlying understanding of the future for the Japanese economy, how it can continue to become revitalised, and what policy measures will be taken to achieve this.”
Shiozumi says it is this investment into domestically focused areas such as medical and nursing care services, outsourcing business, distribution and robotics that can propel the economy forward.
“We think that with successful implementation of workstyle reforms will assist the revitalisation of the economy, led by increased consumer spending as well as the creation of new businesses,” he said.
 Portfolio holdings that may benefit from such themes include Nihon M&A Center, and M3 Inc.
 Merger and acquisition broker Nihon M&A Center recently announced better than forecasted Q1 results, and Shiozumi expects this trend will continue given the company’s leading position in the M&A advisory industry.
Nihon M&A is expected to generate sustained earnings growth over the medium to long term as it is the pre-eminent player in the mid-sized market, where businesses are looking to consolidate and where family-run businesses look for suitable partners for the next stage of growth. This, as well as Japan Inc’s overall drive for increasing efficiency, will help maintain a strong pipeline of future M&A opportunities to add to the considerable projects the company already has earmarked.
Meanwhile, M3 Inc, an online provider of healthcare services such as a drug marketing platform, recently announced strong Q1 results, with sales increasing 21.1% year-on-year. Shiozumi expects continued outperformance of targets by the company, as demand and effective utilisation of this continue to grow.
Shiozumi added while the entrenched deflationary mind-set among the Japanese is taking longer than expected to change, the economy is slowly being transformed, with domestic consumption coming to the fore.
“The nation’s economy grew at an annualised rate of 4pc in real terms during the April – June quarter, bolstered by strength in a both personal consumption and capital spending, which more than offset a fall in exports,” he said.
“The pace of growth accelerated from 1pc in January – March to mark the sixth straight quarter of expansion, and suggests that domestic demand is becoming the main driving force for the Japanese economy in place of exports.”