We had good conversations about life, the world, what next year might bring, and naturally, investing, since it’s a shared interest. Let me share a few common threads:

3. Chasing growth for another year may not be the best strategy for 2022.

Tom

Tom and I sweated blood at a Japanese brokerage in the early 2000s before they fired us to make way for 3,000 incoming staff following a merger immediately after the “Lehman shock”.

I was somewhat taken aback at his gloomy opening that “there is no macro reason to buy Japan”, almost before we’d had time to complement each other’s remaining hair. I asked him to move the butter knife further away and we went through why.

Japan has become boring. There’s been no economic growth for almost 30 years, and there probably never will be, with the population shrinking at an accelerating pace. But on the positive side, everything seems tickety-boo: inflation is up but not too bad, and borrowing money remains cheap as almost no one wants to do it. Given that everyone who wants a job has one, it’s a nice place to live, with massively undervalued property. The fact that banks can’t give money away is somewhat depressingly dull.

Nothing new in any of that, to be honest. But Topix, Japan’s broad index of nearly 2,200 shares, has been no slouch with a 14 per cent gain this year. It really isn’t that bad!

Will South Korea displace Japan as Asia’s cultural superpower?

In conversations like this, I love pulling out an old data set I stumbled upon a few years ago. According to the Japan External Trade Organisation (Jetro), since 2016 more than half of what Japanese firms make and sell is made and sold outside the country. That’s where the growth has gone. It is poorly measured and not reported in Japan’s GDP or GNP, as the money doesn’t come back in.

This suggests to me that Japanese firms will surprise on the upside as we get to grips with Covid-19. But as you can’t see this growth, or quantify it, it’s more of a leap of faith.

Dick

Dick is the youngest of us and will still be working long after I have opened my retirement pub on a beach somewhere hot.

About one-third of Japanese own stocks, though, and actively invest. Many do their own research, read the Nikkei newspaper religiously, and when they trade with brokers they get broker research for free. Otherwise, they get Dick and his thematic funds.

In Japan’s post-Chinese tourism era, businesses are back in blossom

Thematic investing is a growth business among domestic wealthy investors in Japan, being chased by domestic and foreign investment banks – not unlike the growth in thematic ETFs in the US.

My experience with Japanese retail investors is that they are very well plugged in to themes that guide them to make stock investments. With just shy of 4,000 listed companies making everything from automated farms to avatars, ball bearings to bread rolls, crisps to CAN bus chips, there really is something for everyone and every theme.

In addition to corporates doing well in 2022, this suggests to me that Japanese investors will increasingly latch onto themes as economies recover, and will invest accordingly.

Harry

Harry was very cheerful when I finally got hold of him. And he should be; having retired a few years before the pandemic, he now enjoys life despite social restrictions. And he has just become a grandfather for the second time.

He got rid of his financial adviser as he didn’t think it was fair to be automatically offered just “conservative investment products” or bond funds – he’s only in his mid-60s! With longevity in the family, he may have another 40 years ahead of him. So to save any more arguments with his broker, and with ample time on his hands, he takes care of it himself, doing a very good job too.

His portfolio of Chinese, US and Japanese stocks has done very well, but he has now sold everything China-related and most of his US holdings. Given that yield can be found in Japan if you sniff around carefully, he’s killed several birds with one stone; de-risking, selling growth, staying in equities and increasing yield.

If Harry’s view of the two largest markets – the US and China – is representative, and I think it could be, then his shift into the safety of Japanese stocks with yield presages more money flowing that way. It suggests this could develop as a theme.

Macro-thematics

Tom is right that macro-economics is done as a catalyst for investment flows into Japan. But the concept of macro-thematics – identifying a theme and picking participating stocks – is especially interesting in Japan where you can find just about everything in one market and one currency. So I think Dick is on the right track.

The concept of yield, once absent in Japanese stocks, is back. And with reasonable market volatility over the past two years, it should make the idea of a Japanese portfolio even more interesting. I’m with Harry on that.

Japan, renowned for its safe-haven currency, inflation resistance, low interest rates thanks to a stubborn Bank of Japan, and boring politics, is everything the rest of the world isn’t right now.

With close to 75 per cent of the population double vaccinated, the central cities are coming back to life and Japanese consumers are out and ready to celebrate Christmas – or at least their version of it. There may even be a small spurt of economic growth thanks to their spending, as 69 per cent of gross GDP historically has come from the service sector.

Heading into 2022, which by all accounts seems set to be another miserable year, perhaps even those investors who have written off Japan for being “too boring” will find that’s just the quality they’ll be looking for.

Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets