Talking about Japanese equities, 2016 can be divided in two timeframes.
Firstly, there was the period from the start of 2016 until roughly July during which financials heavily underperformed, exacerbated by the Bank of Japan's Negative Interest Rate Policy. Then there was the sudden trend, which began in the summer, which was then catalyzed by the US election, the rebound in financials, and commensurate sector reallocation as at least pro-forma growth from yield curve normalization became evident for banks and insurers, which traded at decades-low multiples.
Japan's largest single-country trade partner, the US, seems set to change direction radically in 2017. Prime Minister Shinzo Abe was the first leader to meet Mr. Trump and the shared interests of the two countries might be thought to outweigh their differences: focus on business, shared caution towards China and acceptance of currency adjustment amidst a normalisation of interest rates for the US Dollar. Japan itself has one of the longest-lasting post-war administrations ever, and a continuity of policy, which is becoming unusual in developed countries. 2017 will see the anniversary of Japan's Negative Interest Rate Policy and if current rates are maintained we should see a considerably lower Yen / USD and a further diminution of the effect of the consumption tax hike, at least in year-on-year comparisons. For a stock picker on quality growth equity stocks like Comgest, it is just important that policy cannot obstruct great company-specific stories.
Japan remains a significantly misunderstood and under-researched market, mainly because of its legacy of twenty years of meagre performance. We believe that Comgest's parameters of quality and growth should continue to pick up special ideas which can outperform, even on a global basis. This could mean either companies with worldwide technology or brand franchises which happen to be domiciled in Japan but derive most of their growth outside Japan, such as Keyence, or companies tied to specific vectors of change within the domestic economy which have not really been noticed yet by outsiders, like Hoshizaki in restaurant equipment.
Other samples of the recent growth dynamics of our portfolio holdings include, among the others, Relo Holdings, a leading provider of corporate benefits management systems. The company confirmed continued stable growth in the outsourcing of corporate housing, rental accommodation management and benefits schemes, including through the integration of acquired operations. Online apparel major Start Today reported 70% operating profit growth for the July-September quarter versus the same period one year ago. Its broader line-up of brands and improved customer spend seem to have kick-started its growth.
Richard Kaye - portfolio manager - Comgest Growth Japan