A once in three-decade type of opportunity

Ally Selby: Hello and welcome to The Pitch, brought to you by Livewire Markets. I'm Ally Selby, and today we're talking all about Japan. A lot of us are travelling there, but how does it stack up as an investment opportunity? To find out, we're joined by June-Yon Kim, who is the head of Japanese equities at Lazard Asset Management. Thanks so much for joining us today.

You've been investing in markets since 1996. How does the current opportunity in Japan stack up against previous cycles?

June-Yon Kim: In a word, I think this is probably the best opportunity we've seen in nearly three decades. Japan has been a country that has been stuck in deflation for nearly three decades and has had to overcome a significant amount of overvaluation. Right now, we're finally seeing a confluence of events, which is putting Japan in a very good spot. One in terms of a corporate tailwind, in terms of governance improvements. That's actually accelerating more recently. But more importantly, Japan has finally exited deflation. I think a lot of the reasons and the peculiarities of the Japanese market can be explained by deflation. With Japan normalising, what we're going to see is a much different Japan compared to what we've seen over the last 10 to 20 years, and I think that's extremely exciting.

You talked about some of the big tailwinds there. Are there any risks that you think investors should be aware of?

First and foremost, the biggest risk would be, obviously, that we slide back into deflation. A lot of the views that I have are premised on the fact that Japan has seen the end of deflation. From a valuation standpoint, we're in a much better spot compared to where we were 10 or 20 years ago, so even if we backslide into a little bit more of a deflationary environment, I don't think it would be completely detrimental to the market outlook, but it would definitely be a headwind. 

With those headwinds and tailwinds in mind, what are you looking for when assessing companies that make their way into your portfolio?

We are a fundamental bottom-up team. We spend most of our time meeting with company management, evaluating more or less as we see industrial change or sectoral change, and how that company is positioned. Are they a winner or loser, very simply in those terms, and what are they doing from a bottom-up standpoint to really defend their position, and improve their position? From a competitive standpoint, our job is stock picking more so than anything else, and what we're trying to find are companies that are adjusting better to their competitive environment relative to others.

Which stock do you think is adjusting better to its competitive environment? What's your top pick within Japan today and why?

In general, we don't really discuss our top picks, but let me talk about this shift away from deflation. The portfolio is significantly overweight financials. Obviously, with deflation, you had a declining interest rate and declining net interest margins. If we're right about this view of exiting deflation, we're going to see a period of normalisation as you see increasing policy rates. This will translate into improving earning spreads or lending spreads for a lot of Japanese banks. We think the financial sector is very well positioned to benefit from a move away from deflation into a normalised period of inflation overall.

One large holding that we have is Mitsubishi UFJ Financial Group (TYO: 8306). They're Japan's largest bank. Historically, they've always been viewed as probably one of the best-managed banks in Japan. They have a very attractive book of business in the fact that they're diversified through their ownership of Morgan Stanley (NYSE: MS) in the United States. They have a 20% equity holding there, but also they're very well positioned in the domestic market overall, so we think they have an extremely strong franchise. 

More importantly, as a bank, they're very focused on shareholder return and thinking about that position of capitalisation and making sure that they are the most appropriately capitalised. If they are in an over-capitalised position, they would actually return more money to shareholders via increased dividends or increased stock buybacks.

Managed Fund

Lazard Japanese Strategic Equity Fund

Global Shares

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