Japan looks set to have a positive year in 2021, market watchers argue, after handling the Covid-19 crisis better than some developed markets in terms of both coronavirus cases and financial impact.
Japan managed the Covid-19 outbreak with a more conservative approach than some, with limited testing and making social distancing voluntary.
According to the World Health Organisation (WHO), the country has seen 187,103 confirmed cases of Covid-19 and 2,739 deaths this year, although there has been an increase in cases recently. But this is still a marked difference when compared with the UK, for example, which has seen 1,888,120 confirmed coronavirus cases over the same time frame.
By avoiding the full-scale lockdowns used by other countries, Japan has been able to limit the damage inflicted on its economy. Businesses were able to continue trading, admittedly at a reduced rate.
Performance of indices YTD
Source: FE Analytics
Looking ahead and Nicholas Price, portfolio manager of the £286.6m Fidelity Japan Trust, said Japan looks well placed to benefit from the global recovery expected in 2021 .
“Japan is a cyclical market dependent on global growth so hence in a 2021 global recovery it is well placed to perform as the virus-related negatives fade and the comparisons become easier,” he said.
“Going forward, the key issues will be the speed with which we exit from the current crisis, the extent and the rapidity of the cyclical recovery and finally the mid-term inflationary outlook due to the scale of the monetary and fiscal stimulus globally.”
Fidelity Japan Trust focuses looks for companies with a long runway of growth and competitive advantages in a growing addressable market. Price will be looking for opportunities in energy efficiency solutions, medical technology, Asian consumption and digital transformation providers.
“There are also a lot of under-researched mid-cap companies in Japan that are creating new markets that I have conviction in,” he added.
“On the other hand, I am generally avoiding companies who have had a one-time boost in Covid-19 related demand or where the recovery will be very delayed.”
Of course, Japan in 2021 will be in a post-Shinzo Abe era after the longstanding prime minister retired this year.
During his 12 years in office Abe was responsible for Japan’s economic reform. Widely referred to as ‘Abenomics’, his three-arrow approach of monetary easing, fiscal stimulus and structural reform bolstered the Japanese economy and the market.
Performance of indices under Abe (in local currencies)
Source: FE Analytics
However, it was made clear by Abe’s successor, Yoshihide Suga, that Japan would continue to back the transformative reforms put in place, bringing some reassuring stability.
New prime minister Suga has already announced his own economic package worth $700bn. The stimulus looks to support corporate cash flow and promote new green and digital technology.
Reiko Mito, investment director of Japan Equities at GAM and manager of the GAM Star Japan Leaders fund, said: “While the expectations are low in the markets, his [Suga’s] policies are pro-deregulation and pro-markets.
“For example, he is keen for industry consolidation, which should improve the profitability of Japanese companies.
“In the short term, his administration is very much focused on Covid-19; however, his policies and outcome may surprise markets down the road.”
Mito highlighted several other areas to be positive about in Japan next year.
Firstly, she said that September’s quarterly earnings confirmed the bottoming out of earnings, with Q3’s results better than Q2’s.
“Profits are still down year on year; which implies the improving trend will continue materialising in 2021 onwards. Fundamentals have just started to recover after leading indicators mostly hit the bottom around May,” she said.
Another reason was Joe Biden winning the US presidential election and how his, hopefully, more predictable foreign policy will see market volatility decline.
“A number of Biden’s policies are supportive to Japanese companies,” Mito said.
“For example, his environmental policy should benefit Japanese companies which have an edge in energy-saving manufacturing.”
A final point is the strong recovery of its Chinese neighbour.
According to the International Monetary Fund (IMF), China is the only economy with a positive projection in 2020. The IMF also forecasts China to have some of the strongest GDP growth in 2021.
Mito said both the strength in production and consumption in China could positively contribute to the Japanese companies’ sales.
Luca Paolini, chief strategist at Pictet Asset Management, agreed with the idea that Japan seeks to benefit the most from a strong China recovery.
“The resilience of China's economy will continue to be a positive force. Hence, Chinese stocks should be among the leaders next year too,” as he expects it to lead the global economic recovery, supported by a weak UK dollar and fiscal stimulus,” he said.
“Japan is poised to benefit from its neighbour’s strong economic recovery, as well its own effective response to the pandemic. It has a higher relative weighting than others in cyclical sectors such as industrials and autos, and is well placed to benefit from a revival in global trade and capital spending as the world re-emerges.”