Spotlight on Howard Smith, Partner & Portfolio Manager, Indus Japan Strategies, Indus Capital Partners LLC
Global Thought Leader Spotlight
Howard Smith, Partner and Portfolio Manager, Indus Japan Strategies, Indus Capital Partners LLC
In my role as the Portfolio Manager of Japan Strategies, at Indus Capital Partners LLC I am responsible for managing Japan-dedicated portfolios at our firm, which comprise of long only and long/short funds. I oversee over US$1 billion in Japan-dedicated assets. In this capacity, I manage the dedicated team of Japan research analysts, based in North America and Japan. I also work closely with our pan Asian teams and portfolio managers, sharing insights and ideas in Japan, that may be relevant for their portfolios.
Japan is at an important intersection of internally generated, self-sustaining, contagious change in corporate behaviour and historically low equity valuations, with current setup being unlike anything we have seen in the last 30 years. Corporate Japan is in a more constructive and confident frame of mind - its Boards have much more outside influence than 10 years ago and corporate balance sheets have been repaired to the healthiest state in recent history.
Following a decade of ultra-loose monetary policy and a sharp impulse of global inflationary pressure, imported into Japan via a weak yen, prices of traded goods and services, as well as wage inflation, are all on the move in a way that has not really been witnessed since the 1990s. This gives Japanese companies more pricing power, improves their prospective return on assets when investing in Japan, and in our view, leads to higher margins and capital returns in the domestic Japanese economy in the years ahead.
On the macro risk, a violent appreciation of the yen would hurt business confidence in Japan, reduce capex and potentially push Japan down a path of disinflation. However, we don’t see this as a high likelihood and believe that the yen is more likely to see a measured and steady appreciation in the future.
Other major risks in Japan that need to be considered are:
the risk of natural disasters (earthquakes),
Japan’s proximity to Taiwan (in case of escalating China-Taiwan conflict). The potential China-Taiwan conflict is a global risk, and not just a Japan-specific one, in our view.
Japan is the third largest economy and stock market in the world, with parliamentary democracy and a strong alignment with the G-7 agenda. As an investing destination, it is cheap and is a good diversifier, as it is not a home to the “bubble mania” of unicorns, venture capital frenzy, NFTs or hot property markets. Foreign investors are massively underweight this market foregoing differentiated investment alpha in their portfolios. Investors who tend to have dedicated exposure have typically done so via passive/index funds. We believe active investing should outperform passive investing in Japan going forward and believe that passive exposure is not the most optimal way for investing in Japan.
In addition, Japan is a critical player in silicon wafers, wafer-fabrication equipment, intermediate materials used in the semiconductor value chain, logic, and power semiconductors themselves, precision equipment, optical devices, med-tech, and heavy engineering. In a world post “peak globalisation”, with a desire for many countries and corporations to re-shore capacity either back at home or in third countries, Japan should be a beneficiary of more leading edge and IP-critical manufacturing technology being built within its borders. This will also present interesting opportunities to investors who spend more time studying these supply chains and Japan’s critical positioning within them.
Howard will be presenting at Global Investment Institute’s upcoming Equities Investment Forum, taking place on Wednesday, 6 September 2023 at the Westin Melbourne, Victoria.
To register your interest in attending, click here or for more information email zlatan.kapetanovic@globalii.com.au.
Howard Smith, Partner and Portfolio Manager, Indus Japan Strategies, Indus Capital Partners LLC
Howard is a Partner of Indus Capital Partners LLC, based in San Francisco. He is the portfolio manager for the Indus Japan Strategies and has worked in the investment industry in Japan for over 30 years.
Howard joined Indus Capital in April 2002 from ING Barings where he worked in their Tokyo research department from 1997 to 2002 as a senior analyst. Prior to ING, Howard was a macroeconomist and country analyst with regional specialisation on North-east Asia for the Economist Intelligence Unit in London from 1993 to 1997. He began his career in 1990 at Nomura Research Institute in Tokyo where he was an editor/economist.
Howard is a CFA charterholder and earned his B.A. in Economics and Statistics at the University of York in the U.K. in 1988 and his MSc in Economics at Birkbeck College, at the University of London in the U.K. in 1996. Howard is fluent in Japanese.
If you have enjoyed reading this article, please subscribe to GII Insights, delivered monthly, direct to your inbox and it is FREE!
Disclaimer
The views expressed in this publication are solely those of the individual and do not reflect those of their employer organisation.
All information contained within this publication is general advice only, as the knowledge levels and needs of all individual and corporate investors vary greatly this publication should not be used solely as a decision-making tool, further opinions and information should be sought before making an investment decision. It is the recommendation of Global Investment Institute (GII) that you seek the opinions of a fee-for-service, independent investment adviser before making any investment decision.
The authors, directors or guest writers may have a financial interest as investors, trustees or directors in investments discussed or recommended in this document. It has been assessed by the editors that these financial interests have not had an impact on the material contained here within.
All material appearing in GII’s Global Investment Insights is copyright, reproduction in whole or part is not permitted without written permission from the Publisher, GII.