Long-term growth and innovation in Japan

A professional investor tells us where he’d put his money. This week: Nicholas Weindling of the JP Morgan Japanese Investment Trust picks three stocks.

The JP Morgan Japanese Investment Trust contains innovative and fast-growing companies. We seek out what we consider to be the best investment ideas in Japan to maximise returns, concentrating on firms with excellent long-term growth prospects that are not dependent on the economic cycle.

We believe that an active style of portfolio management that focuses on stock selection conducted by experienced, locally based investors offers the greatest opportunity to add value. We use extensive bottom-up research to identify undervalued earnings growth. Our approach can be summarised as aiming for growth at a reasonable price. There are several key structural trends that we have identified as promising long-term sources of return. Examples of these themes and stocks are detailed below.

Profiting from ageing

The ageing population is generally regarded as a negative for economic growth in the long term, but there are a several companies benefiting from the trend. One example is Nihon M&A Center (Tokyo: 2127), a mergers and acquisitions (M&A) advisory firm specialising in small and medium-sized companies. Japanese company presidents are ageing and the dearth of successors is a long-term problem. One solution is consolidation, especially in fragmented areas such as pharmaceuticals. Nihon M&A Center works as a matchmaker for friendly mergers and acquisitions for small businesses nationwide. It has a strong record in this niche, where large investment banks do not participate.

The march of the robots

As living standards rise in emerging markets, labour costs become more and more expensive for manufacturers operating there. One solution is to increase factory automation, and this is set to be a long-term trend.

The robot-usage ratio in emerging countries such as China and India is still extremely low, so there is significant room for growth. Japan has several leading factory automation providers, such as Keyence (Tokyo: 6861), which should benefit from this trend.

Cosmetics are popular in China

Shiseido (Tokyo: 4911) is a major cosmetics company with a strong brand. The group is benefiting from rising inbound tourism from Asia, with travellers wanting to stock up on their brands and bring them home after coming across them on a previous visit or at travel-retail outlets.

Asian consumers, especially in China, tend to spend more on skincare products than on fragrances or make-up. Shiseido has a strong presence in high-end skin-care products, so it is very well positioned to benefit from rising Chinese spending power. We bought the stock amid clear signs of turnaround following a takeover by new managers. The profit margin is improving from a low base.