Is Japan the investment play of 2023?
This article first appeared on moneymarketing.co.uk on 17th January 2023 History has taught me to be...
Spurred on by memories of last year’s warmer-than-average spring and the heatwave in August, I spent a lot of 2021 getting the garden ‘summer-ready’– dreaming of weekends and evenings spent with long-missed family and friends.
Aside from one hot and sunny week in June and July, however, it’s been a disappointing British summer so far. But with reports of a potential heatwave in the next couple of weeks, is all that about to change?
Here, we take a look at the stocks that could keep us cool and the managers investing in them.
While I haven’t missed the commute, one thing I have missed with working from home is the office aircon. Japanese company Daikin is the leading air conditioner producer globally.
“Whilst it has a presence in the residential air conditioner market, which tends to be more competitive, the company really dominates in the commercial air conditioner market which is much more advanced; with products that can provide heating, ventilation and air conditioning, as well as the ability to set temperatures in individual zones within buildings,” said Archibald Ciganer, manager of T. Rowe Price Japanese Equity fund. “Daikin’s air conditioners are technologically advanced and therefore much more efficient with less energy wastage. Longer term, the company is a structural winner as emerging and developed countries opt for more advanced air conditioners with increasing disposable incomes but also in order to improve energy efficiency and reduce their carbon footprint.”
Richard Kaye, co-manager of Comgest Growth Japan, added: “Daikin, like other great Japanese companies, was first proved in its home market, then leaped to the world stage. Its leadership in areas of air conditioner technology like refrigerant, invertors for air emission control and electricity consumption won it first place in Japan. Daikin then parried that into top share in industrial air conditioners in China, and growing share in the US helped by the Biden administration’s strengthening of environmental regulations. With unit air conditioner diffusion still in its infancy in developed countries, and emerging countries starting to adopt air conditioners, we see a multiyear growth path for Daikin in its core business.”
Our upgrade from a paddling pool to a stand-up pool has been a treat for the whole family. Pool Corp is the world’s largest supplier of swimming pools and equipment, and the only supplier to operate nationwide in the US.
Kirsty Desson, co-manager of ASI Global Smaller Companies fund, told us: “Pool Corp’s scale in a fragmented universe of manufacturers and buyers is one of the reasons for the group’s success. Since buying into the stock at the start of 2019, the company has enjoyed consistent earnings upgrades on the back of better-than-expected sales growth, its resilience through various cycles and outstanding execution by management. More than half of Pool’s earnings come from the maintenance business, which gives the company a high degree of earning’s visibility. We continue to see robust growth for the company, supported by changes in lifestyle and weather patterns, as well as management’s push to find greener technologies.”
“We were invested before the Covid crisis, as the company is the best in class in its field, with strong and increasing profitability, added Cormac Weldon, manager of Artemis US Smaller Companies fund. “This is also a company that is able to pass on increases in price in materials/chemicals to its customers, who have to maintain their pool to use it. Restriction of movement and travel led to increased usage and construction of residential swimming pools that benefited Pool. On a longer-term view, secular backyard living trends, Southern population migration, millennials entering the housing market, de-urbanisation, sustainably higher levels of work from home and increasing automation/connected pools are long-lasting tailwinds.”
And if you are splashing out on a new pool, why not a new swimsuit and summer wardrobe? Inditex is a Spanish multinational clothing company and the biggest fashion group in the world. It owns brands such as Zara.
“Inditex reopened its doors this summer and is ideally positioned to capture the brick-and-mortar retail sales growth,” said Comgest Growth Europe ex UK co-manager, Alistair Wittet. “The company has the best shop network amongst its apparel peers. After the pruning efforts, Inditex still has close to 7,000 shops in more than 90 countries, concentrated on large high street locations which attract most of the traffic. At the same time, Inditex’s pivot to digital investments reflects an accelerating trend to online with online sales growing 70% in 2020 for the group. In Q1 2021 Inditex grew sales by 50% with online up 67%. One can say that the company is currently firing on all cylinders, both online and offline, as the consumer seems be back on all fronts.”
John Bennett, manager of Janus Henderson European Selected Opportunities, told us in his May 2021 podcast interview that he believed Inditex would be a winner as Europe opened up after lockdowns. “We will be eating, we will be dining, we will be traveling, and we will be doing what consumers do, and that is spending money,” he said. “I think Inditex is a winner because we’re all going to go out and we’re all going to consume.”
You can listen to this podcast here:
And finally, as any parent will know, the only way to get children through a hot spell (according to the children anyway) is a constant supply of ice creams…. Globally, Unilever’s products are used by 2 billion people every day. Among its brands are Wall’s, Ben & Jerry’s, Cornetto and Solero.
“Unilever’s diversified portfolio of brands, strong management, sensible balance sheet and significant emerging market sales exposure are supportive of resilient long-term returns and dividend growth,” commented Dan Roberts, manager of Fidelity Global Dividend. “It’s an example of a high-quality consumer staple that has been left behind by a market that has chased after stocks with greater exposure to the economic rebound. We believe this offers an attractive valuation opportunity as reflected in the stock’s 3.7% dividend yield, above its long-term average. Sentiment has also been impacted by concerns around cost inflation and its impact on margins. However, we expect potential margin pressure from input costs to prove transient with the strength of its well-known household brands providing valuable pricing power.”
“Unilever has a diversified portfolio of well-established, market-leading consumer brands, ranging from Magnum ice-cream to Dove soap,” added Chris Elliott, co-manager of TB Evenlode Global Income. “These products have loyal customers that make repeat purchases and are willing to pay extra for their favoured brand. Vitally, this pricing power allows Unilever to navigate inflationary environments by passing costs on to the consumer and finding supply chain efficiencies. The resulting cashflow visibility allows Unilever to invest in projects with long-term horizons and excellent returns – entering untapped emerging markets or setting industry-leading emissions targets. We believe that companies that make such an investment in their future will reap the benefits of high returns over the long term.”