Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Shigeru Oshita, fund manager at Chuo Mitsui Trust International.
It is easy to be overly negative on Japanese domestic stocks. After all, with declining birth rates, the overall Japanese population is shrinking, which means the proportion of elderly people is growing. And that’s partly why domestic consumption is expected to stagnate. In addition, the government’s debt levels remain massive, so public works have been suppressed in an effort to decrease debt. However, plenty of companies are positioned to deal with these big issues. And despite the appreciation of the yen (which makes exports more expensive), many domestic stocks have growth potential. Here are three that I like.
While overall public works were reduced in 2000 as the government tried to cut its spending levels, cost-cutting can’t go much further. The infrastructure built during the rapid economic growth of 1960 to 1970 requires new investment. And various local authorities need to improve their infrastructure to accommodate the ageing population. Tokyo, for example, has already seen increased spending on public works and a number of other local authorities are expected to follow.
Meanwhile, the Ministry of Land, Infrastructure, Transport and Tourism is promoting public private partnerships and private finance initiatives. These will help the many corporations in Japan with excess funds that are finding it difficult to identify effective domestic investment opportunities. In that context, construction contractor Obayashi Corporation (Tokyo: 1802) has a strong balance sheet and is a stock to watch.
We see further opportunity linked to the national ID numbering system, which is a product of Japan’s social security and tax-related regulations. Japan lags behind America and Britain on both social security and national insurance number systems. Indeed, the government’s mishandling of sensitive information relating to pensions caused a public scandal in 2007. In response, the Liberal Democratic Party decided to implement a national ID numbering system. Once in government, the Democratic Party picked up the baton.
The aim is to implement the system by 2013 and digitise government and public administration in more than 50% of Japan’s local authorities by 2020. As a result, tax-collection rates are expected to increase, causing a surge in the government’s revenue. Right now, for example, tax-collection rates differ between corporate employees and the self-employed, but such discrepancies should become a thing of the past. One firm that would benefit is IT services and solutions provider NTT Data (Tokyo: 9613), which has a history of developing government-related data systems.
A third stock to keep an eye on is the largest correspondence education institution, Benesse Corporation (Tokyo: 9783). The decline in birth rates means the correspondence education market isn’t expected to grow. But by diversifying, Benesse has expanded its products for a broader range of age groups. For example, it now manages 172 care homes for the elderly, having entered this line of business in 2000.
This has proved profitable and it plans to increase its portfolio by ten homes per year, which should lead to a stable increase in sales and profits. It has also taken its correspondence education business into China, which means it’s well placed to push into broader, pan-Asian markets.