By Victor Yeung
In US Dollar term, Japan and India are the only two Asia Pacific market indices that have positive year-to-date performance as of the end of August. Granted, negative short-term newsflow was not helpful to emerging markets. For example, the China and Hong Kong markets had a weak summer because of the overhang of the potential US-China Trade War. And currency weaknesses in Venezuela, Turkey, Indonesia and Malaysia have also contributed to the gloomy investment landscape.
Many of these events are still developing and we expect emerging markets to continue to underperform major developed markets over the next several months. In the Asia Pacific, we believe that Japan and Australia remain the best opportunities for investors looking to reduce short-term newsflow risk.
Moreover, we are seeing signs that Japan’s economy is finally on a more solid footing. During the 1990s and 2000s, the Japanese economy kept underperforming its peers, and thus its stock market also underperformed. It was also known as Japan’s Lost Decade.
However, Japan’s fortunes seemed to be finally turning around since 2012. Tourist arrivals, for example, have grown from about 9 millionarrivalsl per year in 2012 to over 28 million in 2017. The monthly arrivals in 2018 so far have also recorded double-digit growth year-over-year. In addition, this growthhase been relatively balanced, with its top source of arrivals split quite evenly between China (25.6%), South Korea (24.9%), Taiwan (15.9%) and Hong Kong (7.8%).
A three-fold increase in tourist arrivals have several benefits: For one, tourists would support hotel occupancy and then hotel rates. Tourists would also spur retail spending, and thus support retail rental growth. This is a primary reason why real estate and REIT analysts track tourist arrivals as one of the key economic metrics.
In addition, a long-term yet sustained growth in tourist arrivals would also support fundamentals for new hotel and mall developments. In the last half-decade, Japan has also been investing in upgrading its infrastructure in Tokyo. The additional demand from tourist arrivals provided enough reasons to attract development capital, leading to increased investment demand for both in enbloc ownership and in Japanese securities.
The revival of the Japanese economy is not limited to real estate. In 2010, Nintendo, an entrenched video game company, was trading at a level where the company’s per-share cash holding is equivalent to 85 percent of the stock price. This means that, at that time, an investor could have invested in the stock and pay 15 percent of the stock price to own the intellectual rights to Mario Brothers, Zelda, and a range of other popular video game names.
One reason for the low stock price of Nintendo was the success of other Sony’s Playstation, Microsoft’s Xbox, and more generally smartphones, which replaced Nintendo’s consoles. However, the company seemed to have developed a new niche, namely a more “kinetic” game console which interacts with players’ physical motions. As of last quarter’s result, the year-old console has sold almost 20 million copies. While this still lags behind Playstation 4’s 80 million units, the company is still back to solid footing. Correspondingly, Nintendo’s share price rose from 10,000 yen per share in 2010 to almost 50,000 yen during its peak in May 2018.
The macroeconomic trend for Japan is not entirely benign. With its rapidly ageing society and reluctance to accept immigrants, Japan’s shrinking population would be posed to be a problem for it to maintain its status quo as the third largest economy in the world. In addition, its government debt is also amongst the highest compared to other developed economies.
However, in selected industries, Japanese ingenuity is sparking a comeback, bringing hopes thathe t country can overcome its economic challenges. Thus, we believe that its long term prospects are also improving. As the rest of Asia may see more negative newsflow over the short term, we believe that a diversified stock portfolio should not ignore Japan.