How a ‘forgotten’ Japan could play a large role in investment returns
Alex Illingworth, co-manager of the Mid Wynd International Investment Trust, talks to us about how...
The Mid Wynd International Investment Trust looks to grow real wealth by investing in a portfolio of high-quality, global equities. Managed by the team at Artemis since 2014, the trust uses a thematic approach to portfolio construction with a strong sustainability focus running through the investment process. It is a core option for any investor looking for a conservatively managed offering that taps into a number of global trends.
In this article, co-manager Alex Illingworth, tells us how the team is investing in this period of uncertainty, highlighting the stocks he believes can ride out an economic slump.
Things have not been this uncertain for many years. Inflation is in double figures and investment banks are playing Top Trumps, competing to make the gloomiest forecasts of where it will peak.
Meanwhile the stock market, after enjoying what some have called a summer bear market rally, has lost its impetus again, called in sick and sagged back to bed.
One of the problems of being an investor is that you have to make predictions – not at a macro level but a stock level. To buy a share you must have some confidence that it will rise in value over the long term and hopefully deliver some income on the way. With so much uncertainty around it is hard to make decisions confidently.
We have two ways of addressing this. The first is to invest defensively in what we call “cockroaches”. These are companies, like Nestlé, Colgate, and Procter & Gamble, that may see margins squeezed a little but should be able to pass on some of the inflation rises. We still need toilet roll, toothpaste, and we need little luxuries like chocolate and ice cream to see us through a bleak winter. Japanese phone company NTT fits this category too – people will still pay phone bills.
Healthcare is another area that can ride an economic slump. Inflation and rising interest rates will not diminish our need for medical treatment – probably the opposite. Healthcare stocks make up over 17% of the portfolio, through companies like Thermo Fisher Scientific, Pfizer and Merck & Co.
A second way to address uncertainty is to explore companies in sectors that should benefit from inevitable trends, like changing demographics or global warming. Times of short-term uncertainty can offer opportunities to buy companies with outstanding long term prospects at attractive valuations.
Take the ageing population – the World Health Organisation (WHO) has predicted that by 2050 there will be 2.1bn people aged over 60 – more than double what there were in 2020.
One company we have recently invested in is Sonova, a Swiss-based company that makes hearing aids. Hearing aid technology has come a long way in recent years. Modern digital hearing aids are increasingly personal, tuned to the individual’s weaker frequencies. They are also able to enhance sound specifically from the direction in which you are looking and to reduce background noise. These sophisticated models are expensive – but they are less noticeable than older counterparts, as well as being technologically superior.
It is not only the ageing population that will need them, either. According to the WHO, unsafe listening practices could cause avoidable hearing loss in over 1bn young people. As these working generations age, the market for hearing aids will only grow.
Sonova’s valuation shot up alongside many “quality growth” companies a few years ago, but recently shares have fallen, as input costs have risen and the cost-of-living crisis has caused consumers to postpone big purchases. Sonova’s price/earnings ratio (P/E) was once around 45x – now it is closer to 22x. Still expensive to some – but we think it is worth paying, given the long-term growth prospects of the company.
Another buy is Hoya, a Japanese eyeglass maker (the falling value of the yen is making Japanese stocks particularly cheap currently). Research suggests over 80 per cent of 20 year-olds in Asia require glasses due to short-sightedness, which is more than twice as many as in Europe. The rise in myopia levels in Asia over the past 50 years is shocking – caused, some think, by more time spent studying and watching screens. This, combined with the ageing population, suggests demand for glasses will rise.
Hoya is one of the leading producers of glasses, contact lenses, photomasks used in semiconductor manufacturing and glass discs used for large data storage. These are all sectors with strong long-term growth potential and – despite the indicators that eyeglass demand will increase in coming years – Hoya’s share price has fallen almost 20% year-to-date (YTD).
The final company to mention is another Japanese global leader – in bike gears and brakes. Rising petrol prices and the desire to be more environmentally friendly are encouraging more of us to get on our bikes. All well and good unless you have a long way to go and hills to overcome! Electric bikes are becoming increasingly popular. Shimano is manufacturing the brakes for them and also developing automatic gears.
Navigating the potholes of a fragile global economy can be difficult and unsettling but if you take the long view, focusing on the destination and putting up with a few bumps, this can actually be one of the most rewarding times for investors.