20 May 2020
Covid-19 has brought the world as we knew it to a standstill. As global economies begin to ease their restrictions, Ernst Glanzmann, Reiko Mito and Lukas Knueppel of GAM Investments take a look at the potential ramifications the pandemic may mean for Japan’s corporates.
The acceleration of structural trends
We anticipate the impact of Covid-19 will result not in large shifts in or alterations to the structural trends that were already in place, but in an acceleration of the pre-existing transformational processes, the advancement of which we believe is inevitable.
One of the most pronounced trends that is shaping the lifestyle of consumers is the digitalisation of shopping, leisure and payments. E-commerce, streaming and cashless payment platforms are witnessing significantly greater demand as a result of social distancing. Another growing area is online medicine, as the pandemic has boosted the digitalisation of pharmaceutical marketing and demand for AI diagnostics and telemedicine. The shift towards working remotely, as well as leading to a further acceleration in data transmission as more companies move to cloud solutions, also necessitates even larger investments in data centres, semiconductors and 5G. Some of this extra demand might level off after the threat of the virus has passed, yet we do not expect any reversal in these long-term trends. There are, however, some sectors where the longer-term impact from Covid-19 is less certain, such as tourism and transportation.
Implications from a potential shift in global supply chains
It is difficult to predict the future of Japan’s corporates in the wake of rising tendencies of protectionism and the demand for more local procurement and production. The impact could be most severe in the manufacturing industry, where the importance of cash and surplus inventory were recognised during the pandemic crisis. In the future, production might be accelerated to return to Japan in order to ensure stable supply; this could lead to an increasing cost burden for some companies. On the other hand, Japan’s strong foothold in the robotics and factory automation field could benefit from increasing order intake as a result of shifting global supply chains.
Risks from deteriorating China and US relations
As the virus originated in China, a further deterioration to the trade conflict between the US and China is probable. This could lead to a scenario in which other countries may eventually need to choose a side, so to speak. Based on historic precedent, Japan is likely to side with the US in such a scenario. This would have negative consequences for Japanese companies with large operations in China or suppliers of semi-finished goods to Chinese assemblers which sell into US markets.
We take a long-term view, with the goal of participating in the value creation of growing companies operating in attractive fields, in addition to benefiting from structural trends. We feel that quality companies with profitable margins, solid balance sheets and proven management once again proved their resilience during the downturn in the first quarter.
We trust in the management of certain companies to address cost savings where sensible, in order to protect profitability and to weigh strategic decisions that are more common in times of crisis. We believe and anticipate management may prove agile vis-a-vis both short-term and structural changes following Covid-19. As mentioned earlier, they might face some cost burden, similar to companies across the globe, associated with the increase of working capital or with the repatriation of production sites; however, many companies have proven track records in overcoming challenging times in the past. Witnessing the impact of Covid-19, we are more confident than ever that carefully chosen companies operating in the right fields should continue to deliver for their investors.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.