Trends such as factory automation, e-commerce, and communication technologies for working from home, will persist beyond the Covid-19 crisis – brightening the outlook for Japan equities 2021, says Yuichi Murao, Head of Investment, Japan Equity, at Nomura Asset Management.
To call 2020 as a year of surprises would be an understatement. Covid-19, while limiting our activities has expanded our vocabulary – lockdown, social distancing, non-pharmaceutical intervention were expressions we rarely heard this time last year. It has also wrought enormous but hopefully temporary damage to economies, corporate earnings and vulnerable sectors of the equity market worldwide.
Stock markets collapsed in February as the implications of the pandemic became apparent, but the 28% slump in the TOPIX index for the year to March 16 was followed by a parabolic turnaround as the market surged more than 16% from the low point to the close of the first quarter. Governments and central banks around the world had responded quickly with stimulus policies of unprecedented scale. More recently, stock markets have soared yet again on the news of potential breakthroughs in the development of a vaccine against the Covid-19 virus. In November, the Nikkei 225 Index vaulted to its highest level since 1991 while the TOPIX benchmark had climbed back to where it started the year.
In terms of the public health impact, Japan has been an outlier among large developed countries. Despite its densely populated cities and an aging population, Japan’s hybrid system of public and private healthcare providers funded through social insurance has managed to contain the Covid-19 outbreak and kept the mortality rate relatively low. However, with numbers of coronavirus infections accelerating in recent weeks, we should not underestimate the risk of another resurgence of the pandemic.
We are witnessing a recovery driven by manufacturing industries – supported by strong economic activity in China. In Japan, corporate earnings are following a similar trajectory. Indeed many companies have managed to deliver surprisingly solid results towards the year-end, and are exceeding expectations in terms of both current earnings and outlook projections.
In August, Japan’s longest serving Prime Minister Shinzo Abe announced his resignation citing health reasons. He spearheaded the `Abenomics` program, a set of growth oriented economic policies focusing on monetary easing, fiscal stimulus and structural reforms.
His successor and long serving Chief Cabinet Secretary Yoshihide Suga achieved a landslide victory in the ruling Liberal Democratic Party’s leadership election in September, ensuring the country’s continued political stability. Since taking the helm, Suga’s government has pledged to cut greenhouse gas emissions to net zero by 2050, vowing to transform Japan’s policy on coal-fired power generation, and boost innovation in renewable energy. The government also aims to boost fertility rates by covering fertility treatments under the national health insurance.
Japan equities 2021 – optimistic outlook
The path to economic recovery is beset with uncertainty, depending on the progress of the vaccine development and the effectiveness of the public-health responses worldwide. We can expect to return to a certain level of normalisation and can even paint a more optimistic outlook for the coming year. This could prove to be an “uneven” recovery, with increased divergence between sectors.
The rapid economic recovery in China (3Q2020 GDP +4.9%, yoy), Japan`s largest trading partner, highlights the advantages of global manufacturers that can rely on exports for growth. While further growth may hinge on technical questions around the delivery and storage of these vaccines, such breakthroughs could eventually lead to a recovery across various service sectors including financials and hospitality.
In the short term, we may expect to see some fluctuations as investors attempt to determine the form of economic recovery. High quality growth stocks have continued to soar through the pandemic, whilst value stocks have suffered an extended losing streak over the past decade. Markets have demonstrated sporadic rotations into value stocks since July, but these have been shortlived amid volatility and an uncertain outlook.
Resilient and innovative companies
We want to highlight some of the consistent winners during the coronavirus era – resilient and innovative companies that are able to sustain high ROE and continue to emerge even stronger.
The global pandemic has expedited trends that were already in place such as factory automation, e-commerce, environmental technologies, and communication technologies for working from home. In any scenario, we expect these secular trends to persist. As we still face the risk of repeated outbreaks of Covid-19, innovative and resilient companies that are aligned with these underlying secular themes are likely to emerge stronger.
Keyence is a global leader in factory automation, specialising in products such as sensors and measuring instruments used in the automation of factory assembly lines. New social distancing measures are likely to drive demand for higher levels of automation, and their expertise in providing customised solutions allows them to sustain high profit margins.
Daikin is a producer of world-leading air ventilation products. The air quality of indoor spaces will take on a renewed importance in a post pandemic world. The company is strengthening its product offering by responding to this new air quality demand with equipment that can combine air purification, ventilation, and auto cleaning and disinfection. Daikin has identified potential opportunities in providing antibacterial ventilation equipment for pharmaceutical production facilities and hospitals, air-conditioners that can automatically clean and disinfect, while expanding their sales of air purifiers.
Head of Investment, Japan Equity
Nomura Asset Management
Yuichi Murao has 30 years of Investment Experience at Nomura Asset Management (NAM). He joined NAM in 1990 and became Head of Investment, Japan Equity, in August 2018.