How to Profit from Japan's Equity Market? Interview with Natalie Adams

Wondering what are the current trends in Japan's stock and equity market? What's "In", what's "Out" and how global investors are positioning themselves in this arena?

Below is a transcript from an interview we've conducted on our PodCast a few months back, with Natalie Adams, a former Japanese equity research professional and current host of the popular PodCast "JEMChat", which focuses on exactly those topics - Enjoy!

(To listen to the original PodCast episode, click here)

(Transcript follows- )

Z - “With us today on the show is Natalie Adams ‐ a former Japanese equity research professional, who has started a popular podcast, focused on Japan’s equity market – you can tune into it for free at www.jemchat.com.

After having worked in Tokyo, London and New York, Natalie returned to her native Canada to be with family, and decided to move into a creative field that she’s wanted to try for a long time ‐ film making. So now, she’s successfully combining both of her areas of interest ‐ media and the Japanese equity market. Her current listener base is composed mainly of former clients and colleagues, as well as anyone else interested in the Japanese equity market ‐ who now have a regular and knowledgeable audio source for ideas and information about this exciting arena.

Natalie, thanks so much for joining us today – first, can you tell us a bit about yourself – where did the interest in media come from?”

N – “Well, I got into film production when I met my husband, as that was his line of work. He was working on a movie at the time and so I learned and picked up a few basic things. I researched and wrote a documentary project of my own, and also helped on a project on Korean war veterans. His company then moved on to TV, so I didn't have much involvement in that, but then we were trying different things with that and that's how I got into PodCasting. I actually at first didn’t think that I could do a PodCast, but then I realized that it’s more interesting when the host doesn’t speak a lot, and lets the guest speak for themselves.

So I’ve been doing equity research on my own for some select clients, but it was pretty slow and it wasn’t very efficient. So then I got the inspiration to combine the two interests – I enjoy writing and I’ve got a curious mind, so it was just a very natural progression to combine the two interests.”

Z – “Those two interests being media and Japanese equity? - How did you end up involved with Japan in the first place?”

N – “After graduating from McGill I went to work in Japan, for NEC in their semiconductor division. That experience led me to investment banks looking for professionals who weren’t Japanese but had experience at a Japanese corporate environment.”

Z – “Which is a bit unique, isn’t it?”

N: “Yeah, I think they found it very interesting that I could speak to both Western and Japanese corporate culture.”

Z: “So, how do you combine the two? From your experience, are there any special characteristics of the Japanese equity market that differentiate it from similar markets in Asia, or world‐wide?”

N – “Yes, it’s confusing to some people who think ‘Why is Japan different from the Pan-Asian equity market? Japan IS in Asia’ – but Japan is considered a developed market. That means its’ stock market has fully matured, like the US or Europe - whereas other Asian markets are considered emerging. So there’s a completely different risk profile.

Another way of thinking about it is that Japan doesn’t have the growth potential that other Asian economies have. This is why Japan is very much a value investor’s playground. And so, whenever there is global growth Japan always benefits from that.”

Z: “I see. And have you seen any signs of it being different just after the global financial crisis ending? People here seem to think that the market has then bottomed out – it’s been going up and down since then, but have you seen any signs of Japan breaking out from that?”

N: “Yes, certainly. Abenomics had people very very excited about it – is this Japan’s real break-out, VS plain global growth, like I just mentioned? People were really focusing on Japan. And I think that hope hasn’t been fully dashed yet. With the scandals and global risks at play now, people may be a little less enthusiastic than they were a year ago - certainly back in February, when the market corrected heavily, there was a lot of fear - but I think overall the feeling of optimism regarding Japan is quite high.”

Z: “Interesting, we hear similar stuff here in our industry as well, in real-estate, mainly since Abenomics - but people really seem to be wondering if this is just fluffy, feel‐good stuff, is the confidence superficial, manufactured - or is it actual change – what do feel, from your experience, what’s your gut feeling on this one?”

N: “Well, I think people who have looked at Japan and been involved in the Japanese market for a long time, are always very cautious about getting overly excited – because we’ve seen a lot of false starts and false hopes, only for the market to correct heavily.

Because it seems, like I’ve been saying, when global growth starts to reverse, Japan gets hit very badly. And whatever is happening domestically is not enough to overcome those global macro fears. But I think people think there’s more to it than just fluffy feel-good stuff this time around - we’ve seen some solid improvement in corporate governance, and I’ve been hearing from people on the PodCast that when they go and visit companies, they are seeing some genuine results.”

Z: “So what are popular investment strategies for people who are invested here, and why do they pursue those?”

N: “Like I said before, Japan is mainly a value investor’s playground. When you compare Japanese corporations globally, they have a lot of cash, they have a lot of land on their balance sheets. And there’s a lot of large market cap stocks that are very close to their book value, and they’re very liquid – so this is very attractive to many global investors, who see the value in Japan and find that very attractive.”

Z: “So to those of us who aren’t too savvy with equity market terms and strategies, does that mean people are buying shares in large, stable, blue chip type companies, as opposed to more risky, potentially more profitable start‐up type stocks? What does that actually mean?”

N: “It really depends on the type of investors. There are definitely investors out there who are looking for that growth of a small start-up, and they’re willing to take the risk of a small cap company, with lower liquidity - and then there are investors who can only invest in very large cap, liquid stocks that don’t have that kind of growth that a small start-up would have - but on the other hand, maybe they’re trading close to book values, which is appealing to them. So it really does depend on the investor’s profile.

Small caps have done extremely well over the last year, so there’s plenty of evidence that risk appetite is coming back across the board. But for Japanese investors, it’s mainly large liquid companies with strong balance sheet, something with a proprietary technology or a unique business model.”

Z: “Interesting. So what is your typical investor, client, or listener profile? Who are the people interested in Japan, and what actually drives them here, as opposed to other countries?”

N: “Well, for the PodCast, I’m not targeting a particular type of listener or investor. It started generally within my network of sell-side and buy-side professionals, who may not get the opportunity to listen to what the other side has to say, or to what their competitors are saying. In time, I hope to have longer segments on subjects with industry experts and non-professionals, like maybe an industry specialist or a government official who can speak to something on the macro level. “

Z: “Which, I guess, is where our interview from a few weeks back came in – to give people more insights into those different industry segments?”

N: “Yes, exactly. With the PodCast I try to give investors insights outside of their normal research or due diligence. As an investor, it’s very important to analyze from as many perspectives as possible and I find that relying on equity research to shape a view is narrow minded‐ there are often a lot of flaws in relying on sell-side equity research. And also, it’s getting very costly for investors to engage in third party consultations, due to very heavy government regulation.“

Z: “So which other industries do you think your listeners may want to hear more about in the future?”

N: “I think construction, non-bank financial services, software developers…”

Z: “How about real‐estate, does that play a big role in their portfolio allocations? What types of equities do they buy into in this sector? You mentioned developers, how about J-REITs (Japanese Real Estate Investment Trusts), housing companies – anything else?”

N: “For foreign investors, meaning investors who don’t have a presence in Japan, it’s mainly through REITs. They do invest in single stocks. I have to stay away from specifics, and anyway, they wouldn’t tell me specifics about what they’re investing in - but there are investors who are interested in large cap developers like Mitsubishi Estate and smaller ones like Haseko, or Tokyo Tatemono. A few years ago there was quite a lot of interest in the non-bank financials related to housing – but I think those have proven to be quite risky assets, so I’m not sure if that’s something that people are still focussing on at the moment.”

Z: “I see. And, REITs, specifically, has there been a lot of interest them in recent years?"

N: “Yes, REITs are obviously a good way to get into the real-estate market in Japan, because they provide the diversity and due diligence, and the liquidity that investing in a single stock doesn’t have.”

Z: “And how have the last few years played out in this aspect?”

N: “So, in the last few years the positive stock movements and Abenomics have really shifted the focus back onto Japan, and that’s been very welcome for people who have long been frustrated by trying to tell foreign investors that there’s value to be had in Japan, and in the macro economic case, including real-estate – and yield, too, I mean, speaking to a lot of fixed income investors and talking about the yield that real-estate in Japan provides - but I think there’s still the ever present fear that global macro concerns will take hold, the Yen will strengthen, and Japan will slump back into doldrums.

And maybe more pessimistically, that Abenomics will fail. I mean, anyone can see that it’s had some success, so it’s not going to be an abject failure, but maybe not as successful as everyone had hoped it would be – because we’ve all seen it before, unfortunately.”

Z: “Yes, especially with the current inflation targets, that keep being dropped and pushed back, time-wise as well, aren’t they?”

N: “Exactly. Again, these are all things that people who have looked at the market for a long time have seen before. It just seems to be a cycle of lowered expectations.”

Z: ”And, how do you feel – obviously you don’t have a crystal ball on you - but where do you see the market going in the next few years? Any particular challenges or opportunities that you’ve got marked up?”

N: “It’s never an easy thing to forecast, and particularly now, the volatility is really concerning for a lot of investors. I speak to many asset allocators, and they’re very hesitant to be too bullish in one way or the other. I think over a 5-year time frame, if you stick to value companies, like I said, those with solid balance sheets or a very good business model or proprietary technology, and maybe not exposed to global trade, and have a good domestic business - then yeah, Japan has a lot of good companies and a lot of diversity, and I think that’s very interesting for a global investor.

There are a lot of listed companies in Japan that provide lots of different domestic services. And then, if corporate governance reforms do go forward and actually pick up the pace, then that will really provide the icing on the cake. But I think at the moment, the real risk is global markets – are we headed towards a global trade war, a weakening of the US dollar, which will implicitly cause the Yen to rise, which is never good for the Japanese equity market? As flawed as that theory is, that is a reality, and I think that’s on the forefront of many investors’ minds.

Z: “So, I guess, insurance-wise, the best policy is probably diversity, isn’t it? Different strategies, locations, or industries?”

N: “Yes, diversity is always the most prudent path, for any kind of investing. But I think right now, as I said, due to the worries over a global trade war, probably maybe focussing on something domestic, that’s not reliant on the Yen/Dollar, should probably be the focus for the latter part of the year”.

Z: “Excellent advice, thank you for that, Natalie, and thank you very much for your time, as we’re wrapping up - it was a pleasure having you with us.”

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