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Japan veteran readies for manufacturing revival

Japan veteran readies for manufacturing revival

Japanese manufacturing is set for a huge boost as companies begin investing more significantly into their own infrastructure, according to Citywire + Ernst Glanzmann.

Glanzmann runs the GAM Star Japan Equity fund and currently has 31.30% allocated to industrials.

His comments come as the Purchasing Managers’ Index (PMI) in Japan hit a six-month high and Glanzmann said the figures reflect the growing momentum in the industry.

‘Companies are spending again on facilities and this has a meaningful impact on a various parts of manufacturing or machinery manufacturers. We also have seen a better environment for car sales in Japan.

‘We also have seen activity in terms of improving overall efficiency in factories, including using AI or the Internet of Things. In some cases this is a more pronounced strategy, whereas in other companies you don't see much going on.’

Reversing the expectations

In terms of individual stocks, Glanzmann has held Japanese car maker Honda for a number of years, with a 4% position at present. He said investors have overlooked the firm's genuine profitability.

'We see that the valuation is quite low, even in a historical context, but it seems there is pessimism around the company. That is probably due to uncertainty in the US car market, as that market is slightly pressured and stagnating. This has been quite an important element of profit for Honda over the last few years.’

‘The Chinese business has become more important and I feel that the market is currently not at the stage where they give a higher weighting to the earnings dynamic led by China. This could change in the coming years,’ Glanzmann said.

Shareholder benefits

Corporate governance is continuing to improve and Glanzmann said shareholders were benefitting from share buybacks and increased dividends.

He gave tyre maker Bridgestone as an example of a firm which had spent its excess cash on buying back shares, but said the situation differed in each company.

'One has to look at it on a case by case basis. I prefer dividend payments on a strong improving payout ratio where possible.

'I can understand that for some companies, if they have excess cash, it would make sense when the share price is low, like in the Bridgestone case, to buyback stocks in a more vigorous way rather than pay out dividends.’

Over three years to the end of July 2017 the GAM Star Japan Equity fund returned 39.52% in Japanese yen terms. This compares to a rise of 33.66% to its Citywire-assigned benchmark, the Topix TR, over the same time frame.

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