• Food for Thought

Do not forget Japan while you invest in Asia

Analysis by Julien Faure, portfolio manager at Amiral Gestion

Portfolio managers point of view

Asia’s economies are picking up again, with many local companies enjoying a boom and local champions beginning to emerge. And yet European investors are failing to make the most of this momentum. Asia remains underweighted in their portfolios despite the fact that the region offers such a wealth of investment opportunities.

Such clear lack of enthusiasm can be attributed to the specific nature of these markets. Asia’s stockmarkets are not easy to move into because of the region’s accounting standards and language barriers. Many of Asia’s listed companies do not publish any information in English and accessing information can be a difficult and random process. An investor needs to know about the specific features of each market to find information on any given company and must be able to decipher certain culture-specific aspects. Chinese companies, for instance, tend to adopt an optimistic stance and report the good news. Japanese companies, on the other hands, see the glass as half empty and issue very conservative forecasts. An analyst therefore needs to adjust for such cultural mindsets.

Once an investor has overcome these entry barriers, they will gain access to a large number of opportunities in Asia. For instance:

  1. Attractive valuations: forward PE ratios for 2022 are in the region of 15 in Asia compared with over 20 in the USA and about 16 in Europe. Based on Shiller PE ratios (PE adjusted for average earnings over the past 10 years), Asia’s markets look more attractive than elsewhere in the world.
  2. Meagre stock coverage: each big cap in the USA has on average around 20 analysts covering it compared with 17 in China, 3 in India and 4 in South Korea, Thailand and Japan. Narrower coverage creates opportunities. It makes it easier to spot any market anomalies or undervalued companies.
  3. The emergence of a new generation of entrepreneurs: clichés can be hard to get rid of, and Japan is often considered an old and mature country with poorly managed firms. But the reality is actually quite different. Japan sees more than 80 IPOs each year. Many of the start-ups that have listed on the stockmarket were set up by 30/40-year-olds who first cut their teeth at Google or Facebook before moving back home. These firms are very well managed and maintain ties with other economies across the whole region. Pigeon, a leading developer of childcare products primarily for the Chinese market, is one of these little-known Asian behemoths.
  4. A hotbed of fast-growing companies: In the space of 8 years, the number of listed companies has jumped by 33% in Asia’s developed markets and by 54% in the region’s emerging markets (where 8,000 new businesses have listed). Asian companies tend to list sooner than European companies and they will not have received several rounds of funding from private equity or venture capital investors. Asia’s stockmarkets therefore enable investors to capture more value creation than others do.

There are innovative and profitable businesses listing all across Asia and the calibre of these firms is progressing sharply all the time, as reflected in their returns on capital employed. So there are some real investment opportunities to be had.

The above informations come from a study conducted by Amiral Gestion and do not constiture any investment recommendation.