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Top Japan trust checks in to Chinese tourism boom
JPMorgan Japanese manager sees strong prospects for country's hotels as number of Chinese tourists double over last year.
That places it ahead of the other mainstream Japan trusts, although it was beaten by Baillie Gifford Shin Nippon (BGS ), which has a small company focus.
In this video interview Weindling discusses how he is aiming to profit from a relatively young e-commerce sector in the country and outlines which companies he believes will benefit from Japan's booming tourism sector.
Plus, he explains why the country's demographic problem isn't a problem for every stock, and why he is still wary of Japan's banks.
Can't watch now? Read the transcript
Sean Butters: hello, my name’s Sean Butters, reporter with Citywire, and I’m here with Nicholas Weindling, manager of the JPMorgan Japanese investment trust. Nicholas, to start off, your biggest overweight is the services sector. What are the biggest drivers for the sector going forward?
Nicholas Weindling: Well services are a very attractive sector because it’s so very diverse. We can find really long-term entrenched trends there, maybe not the kind of things people necessarily associate with Japan. If for example you look at e-commerce and the internet in Japan, it’s still at a quite early stage relative to the UK, so e-commerce in Japan is only 5% or 6% of retail sales, whereas in the UK it would be nearly 15% now. So what we want to do is look at the kinds of things that work well in other markets, like the UK, and find the Japanese equivalent. So one company that we look at is a company called Next, it’s a Japanese version of Rightmove, but at a much earlier stage of growth, with high growth rates, and the opportunity looks great.
But equally, there are things in totally different areas, like hotels. I’m based in Tokyo and in the last couple of years, when I’m walking on the streets, the single biggest thing that you notice is the tourists around. People never used to go on holiday to Japan. It’s happened very suddenly. The number of Chinese tourists that are visiting Japan in this last year is up over 100% and they’ve got to stay somewhere. There haven’t been many new hotels built in Japan over the last 10 or 15 years and so suddenly demand picks up, those hotels gain pricing power, and that’s why we own companies like Kyoritsu Maintenance, which operates a chain of three-star hotels, so it’s a very diverse sector with lots of stock picking opportunities.
SB: One of your large underweights is banks. What are the key headwinds you see for the sector?
NW: Banks in Japan face one really tough point, which is that interest rates are very, very low. It’s a very tough market in which to make money when interest rates are so low. And it’s highly competitive, so mortgage rates are at levels which people in the UK could only dream about, which is great for consumers, but for the banks themselves, that’s a very tough environment to be operating in. So we just don’t think that’s going to get much better over the next few years. They are doing things like improving shareholder return, which is great, but in terms of the core business, the outlook is still quite tough.
SB: So among the exposure that you do have who are the key players?
NW: If you look at something like banks then we want something that’s differentiated, that’s niche, that’s focused on something different, so a company that we like there is Suruga Bank, which is actually managing to keep increasing its profitability by focusing on different parts of the market, so I think in that kind of area, even in an area that has a tough outlook, you only need to find one or two companies that can do well, and that’s what we’re trying to do.
SB: So for some investors the ageing Japanese population is seen as a negative for investment, but you are seeing some opportunities come out of this…
NW: One of the things I find when I go around and speak to people is it’s one of the big reasons they don’t want to go anywhere near investing in Japan. But the ageing population or falling population, although it’s bad for some companies, it’s great news for others.
If you look at something like the Japanese drug store sector – chemists – the top 10 companies have got about 40% of the market share. The top two in the UK have about that amount, Boots and Lloyds Pharmacy. What is going on with the other 60% of this market? It’s unlisted Mom and Pop stores, they have no economies of scale, no purchasing power, and most of all no successor. There’s no-one to take over that business.
So what we do is invest in a company called Nihon M&A Center. It’s like a matchmaking service for companies, it tries to match those ones with that problem to those that are trying to grow in the long term. And the beauty of that as an investment idea is it’s not something that’s going to play out over three or six months, or even three or six years. It is a long-term, multi-year trend, and we can back that company over the next 10, 15 years. It’s an extremely well-managed company, very heavily incentivised employees, and really in a very attractive niche.
SB: Thank you very much Nicholas.
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by Gavin Lumsden on Oct 26, 2016 at 14:01