Transcript:
Caroline Woods
For years, Japan was known as the Lost Decade trade. Now it’s suddenly back on investors radar. Joining us now is Masayuki Abe, chief product manager at Mitsubishi UJJ Trust and Banking Corporation, joins me here at the desk. So great to have you in from Tokyo.
Masayuki Abe
Thank you for having me.
Caroline Woods
Thank you. Thanks for being here. The funding we’re talking about is the mUFG Japan Small Cap ETF, ticker symbol MGC. It’s the first actively managed Japanese small cap ETF here in the US. But before we get into that, I want to start big picture and talk about the renewed interest that we’re seeing in Japan. What’s driving that shift and why should investors have exposure to Japan in their portfolios?
Masayuki Abe
Thank you. So I believe there’s three things. First of all. First, Japan’s economy is under transformation, marked by the end of deflation. Within the tightening labor markets, we see the wages rising and that’s going to, bring a virtual cycle between the wage growth and the price increases. So a company can easily raise their prices.
Masayuki Abe
And that’s going to run their earnings going for. The second we see a notable of, corporate governance improvements, regular regulators such as in Japan, a financial aid agency, is encouraging the company to operate more efficient. So we see more historical high level of, share buybacks and dividends. And compared to the past years, a fairly the valuation.
Masayuki Abe
So the Japanese equities are undervalued compared to the U.S., counterparts. The one of the reason we I believe, is global investors are underweight in the Japanese positions. And that’s and that’s going to be the one of the reason, the revaluation and the renewed of interest.
Caroline Woods
So as we think about the economic shifts that we’ve been seeing, obviously for a long time, Japan was, you know, kind of known for very low growth, very low inflation. Do you look at those shifts as being structural or more cyclical?
Masayuki Abe
Well, these are going to be more structural because one of the reason is we have a new, prime minister, actually the very first female prime minister, Miss Sanae Takaichi she was elected last October. She’s going to, is going to implement a physical, expansion of physical policy and that’s going to drive the entire economy as well.
Caroline Woods
Okay. You mentioned valuations. Basically, it’s cheaper than here in the US. But the fund’s focus is on small caps, specifically. Why. And does that mean that there aren’t opportunities in large caps or there’s just better opportunities in small caps?
Masayuki Abe
We’ve been doing some marketing since the last 7 or 8 years, and we saw some more interest in this small cap space. So I believe the small cap is going to offer you or provide more alpha to the global investors and as well as a US based investors.
Caroline Woods
Why?
Masayuki Abe
Because, they are more they have lower, higher, earnings growth. And the Japanese large cap companies, as well as other compare, peers in the global market.
Caroline Woods
So as we think about this, you know, big Japanese companies, people now Sony, Toyota, the small caps, maybe not so much. So what are some of the names that are in the fund that should be on our radar?
Masayuki Abe
Well, there’s one most of the, I believe there’s most of the companies in the portfolio is not very known by investors, but one of the investors is a company called Tokyo. Okay. They have a, one of the highest market share and the photoresist for the semiconductor production process.
Caroline Woods
Semiconductors. So similar themes that we talk about here in the US. It’s really driving growth, AI technology. Are you seeing rotation out of that at all though, like we’re seeing here in the US where tech isn’t in favor as much?
Masayuki Abe
I believe that semiconductor or AI related company is going to drive the market for or the at least for the next couple of years, because also the, the prime minister, Sanae Takaichi, that she’s going to focus on the AI conductor, that area. So that’s going to drive that semiconductor as well.
Caroline Woods
For an investor who might be underweight Japan right now. What’s the real case for taking another look today.
Masayuki Abe
Well I believe it’s a company earnings growth. Because again we have the higher a higher growth rates in the small cap space. And I think that’s going to outstanding us us US company as well.
Caroline Woods
What are some of the characteristics that you’re looking for when you’re choosing companies to be a part of a fund?
Masayuki Abe
Well, our small cap strategy is driven by the bottom up approach, and we use a, basically the the next 2 to 3 year growth rates.
Caroline Woods
And for an investor trying to make a global portfolio, how should they think about exposure to Japan compared to exposure to the US.
Masayuki Abe
Right. I believe at least the, same level as the index has a major index, has Japan exposure again because, lots of, global investors are underweight Japan. Even they bring it to neutral. That’s going to impact, Japan market positively.
Caroline Woods
Why are they under weighting Japan though? Because if you actually look at the chart year day chart for the Nikkei at least is outperforming the S&P 500. The one year chart is outperforming. Why would investors still be underweight?
Masayuki Abe
Well I mean probably because it’s always it’s been on the always underweight all the time, because it’s always undervalued as well. But I believe that’s going to change for going for because again we are in the end of the deflation phase.
Caroline Woods
Okay. So it’s an economic shift a corporate governance shift. And then there was one more thing. That was a reason why.
Masayuki Abe
The Prime Minister is going to support the economy. And again, the valuations on value. And we believe that that’s going to expand way for it.
Caroline Woods
Okay. We’ll leave it there. I really appreciate you. You’re sharing your insights. Thank you so much very much. That’s Masayuki Abe chief product manager at Mitsubishi UFJ Trust in Banking Corporation.
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