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Finding Tokyo’s hidden treasures | Financial Times



It’s hard to believe that Japan was once what China is today — the land of opportunity, where young people from all over the world flocked to study, work and make their fortunes.

Everything seemed possible in the booming economy of the late 1980s. As a rookie correspondent in Tokyo I was as amazed by the crazy intricacies of Japanese electronics, the perfection of the £100 melons and the sheer extravagance of gold-flecked sushi.

It all ended in a financial earthquake so bad that the aftershocks are still with us. Japan is no longer the youthful, confident country it was. It has grown old and grey, burdened with debt and fearful of change.

It might seem therefore that today’s Japan has little to offer foreign investors. But as an investment proposition it is a lot better than it looks.

In the past decade Japan has been quietly remodelling itself, with economic reforms led by former prime minister Shinzo Abe and his successor, Yoshihide Suga. Crucially, corporate governance is being improved and Japan’s notoriously opaque boards are subject to greater scrutiny.

Investors have taken note, driving the Nikkei index of leading shares to its highest levels since 1991, this month reaching over 28,500.

But there is still plenty of headroom, with the Nikkei far short of its all-time 1989 record of 39,815. While valuations are higher now than a decade ago, at 14 times earnings share prices are about the same as western Europe’s and considerably below stratospheric US levels. As Matt Brett, manager of Baillie Gifford Japan, an investment trust, says: “It’s not something which keeps me awake at night — valuations in Japan.”

Whatever the pricing of the overall market, there are still bargains in the many sub-segments of this complex economy, with a choice of no fewer than 3,700 companies on the Tokyo Stock Exchange.

The stock picking top-performing UK-listed Japan investment trust — JPMorgan Japan — delivered total returns, including dividends, of 60.9 per cent last year, according to the Association of Investment Companies (AIC) and Morningstar, the data group.

The truth is that, while Japan’s weaknesses as an investment destination often loom large, its strengths have often been overlooked.

Clearly, the demographic outlook is difficult with the population ageing sooner than in other developed countries, due to a particularly sharp drop in births and draconian immigration policies.

Held back by the growing ranks of non-working, non-spending pensioners, gross domestic product has long been stagnant, even before last year’s Covid-induced estimated 5 per cent drop. Companies sit on cash piles, wary of investing, leaving the government to prop up output with public works.

It gets worse. The economic rise of rival Asian states, especially China, has undermined confidence. While few Japanese were ever outward-looking, they have withdrawn further from the world. For example, there aren’t many countries where the number of young people studying abroad has dropped in the past 20 years.

This is not the whole story. Japan is a land of huge scale and sophistication, with 126m people and the world’s third-largest economy. Well-educated workers, life-long corporate training regimes, effective public transport and well-established institutions make Japan a safe and efficient place to work — and invest. Yes, the rules often favour the locals, but where do they not?

Also, investing in Japanese stocks is not investing in Japanese demographic decline or GDP stagnation. It’s putting money into companies with a range of technologies and prospects, which are not necessarily dependent on domestic demand. On average, listed groups make more than 60 per cent of their revenues overseas.

These companies benefit greatly from their proximity to China and other Asian growth markets. While some big names have been eclipsed by foreign rivals — Sony by South Korea’s Samsung, for instance — Japan has a host of manufacturers that remain technological leaders. Nidec in electric motors, for example, Keyence in sensors, and Fanuc in robots.

Alongside these groups stand consumer-oriented companies, known in Asia as quality brands in everything from cosmetics (Shiseido) to baby bottles (Pigeon). In services too there are class acts, such as Rakuten (Japan’s Amazon) and Don Quijote, an innovative discount store chain with a market stall vibe.

Of course, not everything works well. Battered by the country’s post-1989 crisis, banks retain a Dickensian reliance on paperwork. The internet is chronically under-developed, held back by conservative laws and habits.

The pandemic is finally accelerating change, with companies and consumers going online and switching from cash to cards.

However, with ecommerce far ahead in China, the US and most of Europe, Japan is playing catch-up. For go-ahead Japanese that’s a disadvantage — but for internet investors it’s a gift. Nobody needs to reinvent the wheel. As Nicholas Weindling, manager of the JPMorgan Japan investment trust, says: “It’s like a film where you have already seen the end but Japan is only just getting the opening credits.”

Companies he likes include GMO, a cashless payment provider,, a legal document exchange service, and M3, an online medical diagnostics company.

Alongside such growth stocks, Japan also offers solid cyclical companies such as Toyota Motor, Sony and construction equipment maker Kubota.

Some Japanese groups even function as income stocks. The dividend yield on the broad Topix index is 1.9 per cent, compared with 1.5 per cent on the US S&P 500. With bond yields low, these look a useful alternative. Buying individual Japanese shares can be complicated but UK investors can easily access the market through UK-quoted investment trusts and funds.

JPMorgan was not alone in performing well last year. The six Japan trusts covered by AIC/Morningstar data, generated average total returns to UK shareholders of 34.6 per cent. Over 10 years to 2020, the six trusts delivered average returns of 316 per cent.

Open-ended funds also did well, with the leading 10 Japanese company funds tracked by Morningstar delivering average returns of 36.2 per cent last year, and the top fund, Comgest Growth Japan, 40.6 per cent. Altogether 154 large Japanese company funds returned 11.4 per cent. These results directly reflect the performance of the shares bought. The investment trust performance has been better because their own share prices have also risen on top of the portfolio gains.

These managers comfortably beat the market — the Topix index doubled over 2011-20, including a 4.8 per cent rise last year. That’s no guarantee of future performance, of course, but for the past decade the managers earned their keep.

While timing a market is always a gamble, Tokyo now has promising tailwinds. Japan has managed the pandemic effectively, is implementing vaccination and looks well-placed to join the economic recovery gathering pace in east Asia. The Bank of Japan is not only pouring cheap money into the economy like other central banks, but also buying huge chunks of listed stocks through liquidity-creating funds. Analysts expect upward corporate earnings revisions.

It won’t bring back the 1980s. But it could be enough to create interesting investment opportunities.

Stefan Wagstyl is editor of FT Money and FT Wealth. Email: Twitter: @stefanwagstyl

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‘Digital big bang’ needed if UK fintech to compete, says review




Sweeping policy changes and reform of London’s company listing regime will spark a “digital big bang” for the City and turbocharge the UK’s fintech industry, according to a government-commissioned review.

The report, to be published on Friday, warns that the UK’s leading position in fintech is at risk from growing global competition and regulatory uncertainty caused by Brexit

The review, carried out by former Worldpay chief Ron Kalifa, is one of a series commissioned by the government to help strengthen the UK’s position in finance and technology.

Both sectors are under greater threat from rivals since the UK left the EU in January amid growing global competition to attract and retain the fastest growing tech start-ups. 

Changes to the UK’s listing regime are recommended, such as allowing dual-class share structures to let founders maintain greater control of their companies after IPO. The review also proposes a lower free-float threshold to allow companies to list less of their stock.

Kalifa said the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies, meant that the UK needed to move quickly.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry. We should be setting the standards and the protocols for these emerging solutions.”

John Glen, economic secretary to the Treasury, said more than 70 per cent of digitally active adults in the UK use a fintech service “but we must not rest on our laurels . . . all it takes is a bit of complacency to slip from being a leader of the pack to an also ran”.

He said the government would consider the report’s recommendations in detail. 

The review was welcomed by executives at many of the UK’s largest fintechs and leading financial institutions such as Barclays. Mark Mullen, chief executive of Atom Bank, said the review was “essential to maintain momentum in this key part of our economy and to continue to drive better — and cheaper outcomes for all of us”.

The review also recommended the government create a new visa to allow access to global talent for tech businesses, a move likely to be endorsed by ministers as early as next week’s Budget, according to people familiar with the matter.

Fintechs have been lobbying for a visa scheme since shortly after the 2016 Brexit vote, but the success of remote working since the onset of the coronavirus crisis has reduced its importance for some firms.

Revolut, for example, has ramped up its hiring of fully remote workers in Europe and Asia to reduce costs and widen its potential talent pool, according to chief executive Nik Storonsky.

Charles Delingpole, chief executive of ComplyAdvantage, a regulatory specialist, agreed that fintech was becoming more decentralised. He added that the shift in tone from the government could have as big an impact as specific policy changes. “Whilst none of the policies is in itself a silver bullet . . . the fact that the government recognises the threat to the fintech sector and is publicly acting should definitely help.”

The review also proposed a £1bn privately financed “fintech growth fund” that could be co-ordinated by the government. It identified a £2bn fintech funding gap in the UK, which has meant that many entrepreneurs have in the past preferred to sell rather than continue to build promising companies. It wants to make it easier for UK private pension schemes to invest in fintech firms. 

The report also recommended the establishment of a Centre for Innovation, Finance and Technology, run by the private sector and sponsored by government, to oversee implementation of its recommendations, alongside a digital economy task force to align government efforts.

The review has identified 10 fintech “clusters” in cities around the UK that it says needs to be further developed, with a three-year strategy to support growth and foster specialist capabilities.

Dom Hallas, executive director at the Coalition for a Digital Economy (Coadec), said it was now important that people “follow through and actually implement” the ideas in the review. The sector’s direct contribution to the economy, it is estimated, will reach £13.7bn by 2030.

However, the review also raised questions over the role of the Competition and Markets Authority, saying that the CMA should better balance competition and growth. 

“There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech,” it said. 

“Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions.”

Charlotte Crosswell, chief executive of Innovate Finance, which helped produce the report, said: “It’s crucial we act on the recommendations in the review to deliver this ambitious strategy that will accelerate the growth of the sector.

“The UK is well positioned to lead this charge but we must act swiftly, decisively and with urgency.”

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Coinbase: digital marketing | Financial Times




Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

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US stocks make gains on Fed message of patience over monetary policy




Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.

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