Investment Solutions under an Uncertain Market
Key takeaways from Japan Investment Forum
Shinji Inoue, President & CEO, Natixis Investment Managers Japan Co., Ltd., welcomed participants to the Tokyo event – the first such face-to-face seminar in three years – and posed the questions foremost in most investor’s minds, “What will happen in 2023? Will these conditions continue, or will we finally reach a turning point?”
Driven by a strategic affiliate model of more than 20 asset managers, Natixis Investment Managers has the capacity to provide bespoke solutions to a broad range of client needs.
“We do not aim to be the biggest asset manager in the world, but we do have the intention to become the most client-centric asset management company,” says Fabrice Chemouny, Head of Asia Pacific, Natixis Investment Managers.
Bonds are Back
David Rolley, CFA, Portfolio Manager, and Co-head Global Fixed Income at Loomis Sayles is happy to announce “We like bonds again! For the first time in 12-years, with the exception of Japan, yields have begun to approach something that looks like Fair Value,” he says.
In addition, in 2023 bonds will revert to their role in portfolios as a hedge to deflationary shocks to corporate earnings and equities, Rolley says.
“We forecast positive returns in US and Eurozone investment grade corporate bonds with relatively sound fundamentals, given that the biggest risk we foresee in the coming year is a recession,” he says. Rolley is forecasting a winter recession in both the US and Europe, as inflation-driven demand destruction hits US economy, and a natural gas price up energy shock due to the war in Ukraine drives down real activity in the Eurozone.
“Together these imply synchronised, simultaneous recessions in the first half of next year, with the recovery only beginning in in the second half of 2023,” he says.
Japanese growth is also likely to remain weak, with 1% growth cited as “a reasonable forecast for real-GDP in Japan.”
“The reason we cannot be more optimistic is that imported price inflation has damaged the purchasing power of Japanese households,” Rolley says.
That has been illustrated by the sharp decline in the Japanese currency against the US dollar since the start of the year. On January 21 ,2022 Japanese companies and consumers could purchase a dollar for 113.67 Japanese Yen, but by October 20, they had to pay out 150.13 yen for the same dollar1.
Although the yen has risen, the way forward for Japan depends on whether a new central bank governor switches policy after assuming office in April 2023, Rolley says.
Alpha bonds offer Alternative to Traditional Bond Funds
Francois Collet, Portfolio Manager, DNCA Investments is convinced that the financial markets at a turning point, following a 30-year period in which falling yields and other key rates have driven asset prices higher. He believes current low interest rate level has become unsustainable, and that dynamic management prepared to assume some risk is the only route acceptable performances in the future.
DNCA believes that operating with a 'transparent, disciplined and rigorous allocation process' based on top-down macroeconomic analysis, backed up by quantitative analysis of the bond market, allows it to identify the most attractive asset classes.
With its proven and transparent management process, DNCA offers good alternatives to traditional bond funds.
DX is the greatest thing we have seen in Japan in many years
Eric Liu, Partner, Portfolio Manager and Senior International Analyst, Harris Associates cautions against a business-as-usual approach to valuing stocks.
As a value investor, value operations that rely on value indicators are no longer valid, such as Price-to-Earnings ratio (PER) or, Price-to-Book ratio (PBR), he says.
Liu explains that the emergence of new industries and a focus on more intangible factors, such as brand value, have seen assets on the balance sheet becoming divorced from asset values in the market place.
“Today, we have more new-economy stocks, brands are more valuable, and talent and intellectual capital are all intangible assets that are now crucial to creating value,” he says.
The investment philosophy pursued by Liu and his colleagues is based on the idea that value is a function of price and quality, and works via three key tenets;
- buying businesses at a significant discount to our estimate of intrinsic value,
- investing in companies expected to grow per share value over time, and
- investing with management teams that think and act as owners.
The digital transformation (DX) of Japan is a major theme driving the purchases he is likely to make in the future.
“DX is the greatest thing we have seen in Japan in many, many years!
In CEO meetings I have been in Japan, they talk about their DX strategy - increasing software and Information Technology (IT) investment. In contrast, the market does not always value relevant stocks appropriately, and there are scattered instances of share prices being left undervalued. And that is why we have such a high IT weighting in our portfolio,” he says.
There is no Planet B
Mirova is a committed player in the sustainable finance field, according to Anne-Laurence Roucher, Deputy CEO and Head of Private Equity & Natural Capital at the Natixis Investment Managers’ affiliate.
Mirova maintains EUR 25bn in assets under management2 both in developed nations and the emerging markets, and is committed to impact investing, which aims to generate positive, measurable social and environmental benefits.
Mirova invests in three main private asset classes: Firstly, infrastructure in the energy transition field, secondly, private equity, focussed on environmental technologies, and, finally, natural capital, including sustainable value chains both on land and at sea, as well as in environmental assets such as carbon credits.
Japanese investors have experienced low domestic economic growth for several years, and more eco-based investments may help them develop profitable portfolios, Roucher notes.
“Future value creation engines include projects and technologies exposed to secular growth, such as renewable energy, energy efficiency, pollution mitigation solutions, along with agriculture and agro-technologies, certified natural food and fiber commodities and other natural resources.” she says.
We may be fighting a losing battle, however, as natural resources are drying up, and future generations are more likely to experience scarcity and not abundance.
In 2009, the Stockholm Resilience Center drew up a set of Planetary Boundaries3 to identify the nine processes that regulate the stability and resilience of the Earth system, and within which humanity can continue to develop and thrive for generations to come.
Roucher warns that six of these nine planetary boundaries have already been crossed, and says, “Now is the time to act because there is no planet B!”
“Future value creation engines include projects and technologies exposed to secular growth, such as renewable energy, energy efficiency, pollution mitigation solutions, along with agriculture and agro-technologies, certified natural food and fiber commodities and other natural resources,” she says
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2 Source: Mirova and affiliates as of June 30, 2022
3 Source: Planetary boundaries - Stockholm Resilience Centre (https://www.stockholmresilience.org/research/planetary-boundaries.html)
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Actual results may vary.