Letter From Tokyo View From Above A taxing issue for consumers



Letter From Tokyo View From Above A taxing issue for consumers
Letter From Tokyo
Shigeru Oshita, Chief Portfolio
Manager, Japanese Equities
A taxing issue
for consumers
Left out in
the cold
October 2014
Vehicle emissions
– a catalyst for change?
View From Above
A taxing issue for consumers
In the last edition of Letter From Tokyo, I talked about the increase in consumption tax, which increased in April
from 5% to 8%. At that time, I was relatively relaxed about its likely impact, largely because of the fundamental
strength of the Japanese economy. With the tax increase now six months old, it is worth looking at its actual impact
on Japanese consumers.
While the impact on overall consumption has been modest, consumption trends appear polarised between cheaper
daily consumables and more expensive, higher-end products. Retailers are passing on the tax increase and in
an environment where real wages are not increasing, consumers on low incomes are adjusting to higher prices
by consuming less. Conversely, those on higher incomes are continuing to make purchases with sales of more
expensive products almost unaffected.
How have retailers responded? Those focused on low value, commodity-type products (e.g. apparel) are struggling
and have responded by cutting prices, although with limited success. Volumes have not increased even at lower price
points and these retailers are likely to reduce prices further across a wider range of products. Again, polarisation
is apparent across different product categories. A major Japanese television retailer reports that while sales of TVs
below $500 have fallen, sales for big-ticket products, such as 50-inch TVs, remain strong.
My conclusion is that Japanese consumers are clearly differentiating between products. They are purchasing, or prepared
to pay more for, quality products that offer clear value while being more discriminating towards general products.
"Consumption trends appear polarised"
This document is intended for institutional investors and investment professionals only and should not be distributed to or relied upon by retail clients.
Market Overview
Left out in the cold
The launch of the new JPX-Nikkei 400 Index has been seen as a strong
incentive for Japanese companies to become more focused on capital
efficiency and improve their corporate governance. Companies gain
entry into this index based on quantitative criteria such as return on
equity (RoE) and by committing to meet the principles of a governance
code. It is seen as a corporate ‘badge of honour’ to be included.
"This index is
proving to be
a catalyst for
The issue of companies seeking to meet the criteria for index inclusion
is actually indicative of a wider change I have detected from Japanese
companies in general. There is now a far greater awareness of the
importance of shareholder value, and a focus on RoE becoming a key
performance target.
Two companies that illustrate this trend are machinery company Amada
food processing firm NH Foods. In the case of Amada, it has committed
to increasing its payout ratio to 100% (50% dividends, 50% share
buybacks). NH Foods has responded through a share buyback funded
by issuing convertible bonds. Both companies have been rewarded by
investors for their greater awareness of shareholder value.
Investment Insights
Vehicle emissions – a catalyst for change?
Regulations governing vehicle emissions are tightening across the
globe, presenting clear opportunities for particular companies. With
continual increases in emission standards comes the requirement for
auto manufacturers to upgrade components and technology. I have
come across several Japanese parts manufacturers I believe are well
placed to exploit this continual change.
The winners in this process will be those companies who adapt and
respond, manufacturing high quality components able to command
and maintain high margins. Japanese filter and sensor suppliers NGK
Insulators and NGK Spark Plug are examples of companies that are rising
to this challenge successfully. Not only are they addressing a growing
demand, but unlike other commoditised auto-part suppliers, their
products require sensitive process controls using ceramic materials
and therefore have high value content. Their dominant market share
provides economies of scale in production with the high value nature
of their products securing high profit margins.
A further reason for my optimism is that the market for auto components
capable of reducing pollution levels is now truly global and has expanded
to cover commercial vehicles, not just cars. Emerging markets such as
China are moving towards European environmental regulation levels for
vehicles sold in their countries. I believe several Japanese companies
are well placed to exploit these global trends.
markets are
moving towards
European levels
of regulation"
Building the foundations
for recovery
Following 20 years of falling construction investment in Japan, I am
now detecting the first signs of recovery. I think the main reason for this
relates to the earthquake and tsunami that hit Japan in March 2011.
This catastrophic event was a wake-up call for many, resulting in major
new projects and the upgrading of Japanese infrastructure. Vulnerable
buildings are being rebuilt or upgraded in order to provide greater
earthquake resistance.
I think the construction sector has also come to life because of
acceptance that something has to be done to relieve Tokyo congestion.
With 60% of traffic around Tokyo unrelated to residents or business,
three new ring roads are being developed to divert traffic and improve
travel times. The average speed on the main ‘express’ highway around
Tokyo currently is barely 40kph.
The improving economic environment in Japan has also led the Abe
government to promote significant new public and private development.
An obvious example is the level of new investment around Tokyo
prompted by the 2020 Tokyo Olympic Games. These new projects are
not simply restricted to Tokyo. Other regions are also benefiting as
investment is made in upgrading airport runways and increasing bullet
train capacity to cope with higher expected visitor numbers.
However, what is apparent is that not all
construction companies will benefit from
increased construction activity. Often these
new construction projects are complex,
requiring specialist construction techniques.
Given the more specialist nature of many of
these new projects, I would expect current
profit margins within the industry to improve.
The Japanese Equity Growth Fund is managed by
Standard Life Investments’ partner SuMi TRUST
Shigeru Oshita
Chief Portfolio Manager
Japanese Equity
Growth Fund
infrastructure is
now underway"
Important Information
All information, opinions and estimates in this document are those of Standard Life Investments, and constitute our best
judgement as of the date indicated and may be superseded by subsequent market events or other reasons.
This material is for informational purposes only and does not constitute an offer to sell, or solicitation of an offer to purchase
any security, nor does it constitute investment advice or an endorsement with respect to any investment vehicle. Any offer of
securities may be made only by means of a formal confidential private offering memorandum. This material serves to provide
general information and is not meant to be legal or tax advice for any particular investor, which can only be provided by
qualified tax and legal counsel.
This material is confidential and is not to be reproduced in whole or in part without the prior written consent of
Standard Life Investments.
Any data contained herein which is attributed to a third party (“Third Party Data”) is the property of (a) third party supplier(s)
(the “Owner”) and is licensed for use by Standard Life**. Third Party Data may not be copied or distributed. Third Party Data
is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of
the Owner, Standard Life** or any other third party (including any third party involved in providing and/or compiling Third Party
Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of
future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third
Party Data relates.
**Standard Life means the relevant member of the Standard Life group, being Standard Life plc together with its subsidiaries,
subsidiary undertakings and associated companies (whether direct or indirect) from time to time. Standard Life Investments’
equity portfolios invest predominantly in the shares of companies listed on the Hong Kong stock market and B-shares listed on
the Shenzhen or Shanghai stock market. They do not invest in A-shares.
For more information visit our website standardlifeinvestments.com.
Visit us online
Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct
Authority. Standard Life Investments (Hong Kong) Limited is licensed with and regulated by the Securities and Futures Commission in Hong Kong and is a wholly-owned subsidiary of Standard Life
Investments Limited. Standard Life Investments Limited (ABN 36 142 665 227) is incorporated in Scotland (No. SC123321) and is exempt from the requirement to hold an Australian financial services
licence under paragraph 911A(2)(l) of the Corporations Act 2001 (Cth) (the ‘Act’) in respect of the provision of financial services as defined in Schedule A of the relief instrument no.10/0264 dated 9 April
2010 issued to Standard Life Investments Limited by the Australian Securities and Investments Commission. These financial services are provided only to wholesale clients as defined in subsection
761G(7) of the Act. Standard Life Investments Limited is authorised and regulated in the United Kingdom by the Financial Conduct Authority under the laws of the United Kingdom, which differ from
Australian laws. Standard Life Investments Limited, a company registered in Ireland (904256) 90 St Stephen’s Green Dublin 2 and is authorised and regulated in the UK by the Financial Conduct
Authority. Standard Life Investments (USA) Limited, registered as an Investment Adviser with the US Securities and Exchange Commission. Standard Life Investments Inc., with offices in Calgary,
Montréal and Toronto, is a wholly owned subsidiary of Standard Life Investments Limited. Calls may be monitored and/or recorded to protect both you and us and help with our training.
www.standardlifeinvestments.com © 2014 Standard Life, images reproduced under licence

Similar documents

Find Apartment Buildings For Buy In Los Angeles

Find Apartment Buildings For Buy In Los Angeles Lamfinv.com is connected with top investors in the real estate industry. Multi Family Homes for sale is our specialty & we assist investors to look for Income property for sale in Los Angeles with apartments, buildings & other commercial investments.

More information