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The Show Must Go On: Japanese Equities and The Recovery Games

GAM Investments’ Ernst Glanzmann and Reiko Mito discuss why they believe Japan is well positioned for a solid recovery in 2021, aided by the rescheduled Olympic and Paralympic Games, which are set to go ahead despite the challenging Covid-19 environment globally.

25 March 2021

The 2020 Tokyo Summer Olympic Games will finally open on 23 July 2021. Scheduled for a year ago but postponed due to Covid-19, they will also be followed by the Paralympics from 25 August to 5 September, although the organising committee has decided there will be no foreign fans and volunteers.

It is not the first time Japan has experienced Olympic disruption. The 1940 Tokyo Summer Olympic Games was a non-event. Promoted by Japanese organisations since the early 1930s, they were soon forgotten, overshadowed by the war with China and the Second World War. The Olympic and Paralympic Games of 1964 symbolised Japan’s dramatic recovery from war, fuelled its subsequent economic growth and empowered the Japanese people to become contributing members of the global society.

The Japanese government had expected long-lasting social, economic, and cultural benefits from measures related to the 2020 Olympic and Paralympic Games. Prior to the onset of the pandemic, authorities had billed the events as the ‘Recovery Games’, as Japan wished to showcase its resilience and reconstruction from the 2011 earthquake, tsunami and nuclear disasters. The term has since taken on a second meaning. Given the continuing global Covid-19 crisis, economists at the Daiwa Institute of Research estimate domestic consumption expenditure is expected to decrease by 60-70 billion yen due to the absence of overseas visitors to the Games, compared to what it would have been under normal circumstances. In addition, if the capacity for Japanese visitors is limited to 50%, the decrease could reach 130 billion yen1 . Even so, the economic impact of excluding foreign spectators from attending the Olympics looks likely to be a price worth paying, providing the event can go ahead. More importantly, it is desirable from an economic and health perspective that the Games be held with safety and security in mind.

Meanwhile, various events scheduled in parallel to showcase new advanced technology will still take place, albeit on a much smaller scale, such as those related to autonomous driving. Many initiatives surrounding the Games will also symbolise the positive change Japan is seeking in creating a green economy. These include manufacturing medals from raw materials harvested from ‘urban mines’, such as mobile phones; fabricating podiums from recycled plastic; and using timber provided by local governments across Japan in the Olympic / Paralympic village, with plans to eventually return the timber. Torches have been built with aluminium previously used in temporary housing for the survivors of the 2011 earthquake and tsunami, while over 500 fuel cell electric vehicles will be used as passenger cars for transporting participants and stakeholders. Such projects will aim to illustrate to a global audience the links between the Games and sustainability, which could help catalyse behavioural change.2

Reasons for a recovery

Alongside the Games, we see several reasons why Japan is well-positioned for a solid recovery in 2021, potentially outpacing other industrialised nations. Japan’s Covid-19 caseload is relatively mild compared to other developed markets. In the manufacturing sector, machinery orders (a kind of heartbeat sensor for Japan) have picked up nicely during the last several months, similar to global orders of numerical control for machine tools and industrial robots.

We have seen a number of structural changes occur in our daily lives following the outbreak of Covid-19, such as the move to online shopping, streaming entertainment and working from home practices. We believe the shift to online and cloud computing will accelerate in many more areas. Meanwhile, many companies have benefited from an acceleration in changes which were already happening, including online medical services providers, software providers and components suppliers for data centres and factory automation. We continue to believe the evaluation of management is critical in stock selection. In our view, only quality management teams will continue responding to the forthcoming acceleration of digitalisation with sufficient agility.

In addition to these structural changes, we are witnessing the increasing importance of ‘online-merge-offline’. Those companies which can swiftly adopt such a model are likely to better survive and emerge stronger following this economic downturn. This is true not only in the consumer space, such as retailers of apparel and household goods but also in the business to business space, such as sales of corporate hardware and software or supply of remote maintenance services. Following the Japanese government’s commitment to invest in environmental projects, business opportunities are arising. That said, stock selection will play a key role as the profitability differs from project to project.

Importantly, the latest round of quarterly earnings in Japan have, on average, shown improvement from the previous quarter. Starting from 2021, profits growth year-on-year should materialise as fundamentals have been recovering after leading indicators mostly hit the bottom around May 2020. The equity market should react along with the improving trajectory. We expect a sharp earnings recovery this year and anticipate earnings to reach new historic highs in the financial year 2022 / 2023 after the previous peak in 2018.

Ultimately, we believe the Japanese equity market is set to deliver positive performance in 2021. The recovery has just started, in our view. Despite the disruption, we hope the ‘Recovery’ Tokyo Olympics and Paralympics leave a legacy that is carried forward to future Games. We look forward to watching over 10,000 inspiring athletes from around the world compete. Notably, these will be the first gender-balanced Games in history – a landmark in gender equality on and off the field of play, paving the way for a more equal and inclusive society. 3

1Daiwa Institute of Research Group. March 2021.
2Tokyo 2020 Sustainability Pre-Games Report. April 2020.
Important legal information
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 of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.

Ernst Glanzmann

Investment Manager

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