While Asia’s rising middle class has been widely discussed over recent years, what is less well known is how rising incomes in the region have become considerable sources of alpha for Japanese equity funds.
The integration of the Japanese economy with the rest of Asia is somewhat underreported, yet is of great importance. It is a story that has evolved over the past 20 years, so much so that many Japanese companies are successfully growing their market share both in the Business-to-Consumer (B2C) and Business-to-Business (B2B) markets across Asia.
While rising incomes in Asia mean consumers are able to spend money on quality brands, which Japanese consumer stocks are benefitting from, there is a flip side. Real rising incomes are great for consumers, but they place greater pressure on companies having to pay higher wages. As a result, businesses have been forced to adopt more technology into their processes to drive productivity and protect profit margins.
Robotics and other modes of automation are increasingly being utilized to counter the impact of more expensive and scarce labor. Indeed, the adoption of automation and robotics is set to soar in China and other Asian countries to both boost efficiency and improve quality. This is very favorable for related businesses over the next decade because automation and robotic penetration in China and the rest of Asia is still extremely low compared with countries like Japan, Germany and South Korea.
Meanwhile, more important than the fact that wages are rising, China and other Asian countries need to improve the quality of their output and climb the value chain. While China has been well-known as the world’s manufacturer of low-end products like children’s toys, it has also risen up to produce smartphones, LED screens and other technology. This shift from a relatively simple to a much more complex product requires higher quality along the entire supply chain. We believe automation is imperative for these companies as it can help to increase in the quality of products and to deliver that quality consistently.
So where are the investment opportunities? The Matthews Asia Japan Fund seeks to invest in three types of Japanese growth companies: those that capture domestic demand, companies that are regionally expanding into Asia, and finally the global leaders.
When it comes to robotics, Japan has some of the leading companies in the world, in addition to several key component suppliers, which can be beneficiaries of increasing demand from both domestic and global markets in the coming decade.
Take the automation of warehouse space in e-commerce. More and more companies are looking to replace low skilled workers who pick products from miles of warehouse space. One online retailer has started using robotic shelves that bring products to workers who package them for online orders. It claims that the process is more efficient and a good example of how a combination of human labor and automation can increase overall productivity. Several of the key components for this robot are produced in Japan.
With global demand for robots and automation likely to grow unabated, it is in this type of area that we see Japanese companies really taking advantage of these new growth opportunities.
For Institutional/Professional Investors Only.
Past performance is no guarantee of future results. The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect the writer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC (“Matthews Asia”) does not accept any liability for losses either direct or consequential caused by the use of this information.
This document is not a Prospectus/Offering Document and does not constitute an offer to the public. No public offering or advertising of investment services or securities is intended to have taken effect through the provision of these materials. This is not intended for distribution or use in any jurisdiction in which such distribution, publication, issue or use is not lawful. An investment in Matthews Asia Funds may be subject to risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The current prospectus, Key Investor Information Document or other offering documents (“Offering Documents”) contain this and other information and can be obtained by visiting matthewsasia.com. Please read the Offering Documents carefully before investing as they explain the risks associated with investing in international and emerging markets.
In the UK, this document is only made available to professional clients and eligible counterparties as defined by the Financial Conduct Authority (“FCA”). Under no circumstances should this document be forwarded to anyone in the UK who is not a professional client or eligible counterparty as defined by the FCA. Issued in the UK by Matthews Global Investors (UK) Limited (“Matthews Asia (UK)”), which is authorised and regulated by the FCA, FRN 667893.