The Japanese stock market should continue to do relatively well as long as earnings continue to grow, says Eileen Dibb of Fidelity Investments, who manages Fidelity AsiaStar and Fidelity Japan. When Dibb and her colleagues look at equity valuations across the board in Japan, stocks generally look fairly valued at this time.
"Changes in Japan for corporate governance, and the administration of Japan's prime minister, Shinzo Abe, have pushed companies to become more profitable," says Dibb, who is based in Rhode Island. "We're talking about ROEs (returns on equity) that have expanded 8% or 9% in companies that have really gotten religion around restructuring and profitability and shareholder returns." Government initiatives that been positive developments for Japanese business include monetary stimulus, increased public spending, and economic reforms to boost corporate earnings.
Looking back historically at Japan, Dibb says that after the Japanese market "bubble" that burst in 1990 and the nearly quarter-century bear market that ended about 2013, valuations came down to a reasonable level. The strong global economy is also a positive factor.
Looking back over the past 10 years, Japan has had lacklustre returns compared with global markets as a whole. As measured in U.S. dollars, the MSCI Japan Index has a total return including dividends of 4.1% in the 10 years ended Feb. 28, lagging the MSCI World Index of developed markets, which returned 6.6%, and the S&P 500 total return of 9.7% in the U.S. But over the past one- and two-year periods, the MSCI Japan Index has had returns exceeding 20%, outpacing global developed markets as a whole.
The Fidelity management team incorporates a macroeconomic view as part of its investment process, factoring in thematic trends in industries and sectors that they have identified in their research.
However, the close to 40% weighting in Japanese stocks in the Morningstar 4-star rated Fidelity AsiaStar isn't a top-down tactical call. Nor is it a passive strategy, even though the Japan weighting happens to be close to that of the fund's market benchmark, the MSCI All Country Asia Pacific Index.
Rather, country weightings in the fund are the outcome of the fund managers' stock-picking process, which is largely based on company fundamentals. Likewise, the current sector weighting of 23% in technology and 23% in financial services also stems from bottom-up stock selection.
"Japan happens to be a very innovative place in technology across the board over many, many years," says Dibb. It's a kind of quiet innovation, she adds, and people don't always realize that that is where things have begun.
"And then you have some big ideas that people are focusing on globally, like automated driving or faster automation," says Dibb. "Japan has some of the top companies in the world in those areas."
Among Fidelity AsiaStar's top 10 holdings is SoftBank Group Corp., a telecommunications and e-commerce business based in Tokyo. "SoftBank has two businesses," says Dibb, "a domestic Japanese telecom business and a business arm in investments in technology companies and telecom companies globally. So investing in SoftBank is participating in a portfolio of world-class growth investments, including a leader in internet chip technology."
In the financial-services sector, Tokyo-based Orix Corp., a diversified company that specializes in leasing and consumer financing, is a favoured holding. "All along its history, it's been a good allocator of capital," says Dibb. "It deploys relatively well to create future sources of fee revenues and capital. It has been inexpensive for a while, so this sort of goes to our growth at the right price."
Outside Japan, HDFC Bank Ltd., which is based in India, is one of the largest holdings in the AsiaStar mandate. "It's one of the largest private banks in India," says Dibb, "and Indian banking overall grows at a reasonably good clip. HDFC Bank is really the lowest cost, highest asset-quality bank in a market that generally grows loans in the high single digits."
Of utmost importance to Dibb is finding companies that are growing, that manage their growth in the right manner, that spend capital wisely and return capital to shareholders when appropriate. "That, to me, is one of the number-one things that will help a stock outperform over the long term."
Otherwise, you could be in a good sector but you could not be executing well, Dibb adds. Or you could have a great opportunity and not capitalize on it. As long as her investment thesis for a company holds, Dibb tends to hold stocks from three to five years.
In addition to her two decades of industry experience, Dibb completed a program of study at Nanzan University in Nagoya, Japan, and is fluent in Japanese. "I think that having lived there has really helped me think about the way Japanese management approach things in a slightly different manner," she says. "To me it’s kind of my second skin. I try to look at the forest but because I do speak the language, I can also look at the trees when I need to."
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