EP 3: Economic Potential and Opportunities in Asia (China and Japan) | Lighthouse Canton IDEAs Podcast

This podcast was recorded on 22nd June 2023 and was prepared based on the information available as of the date of recording.

In this episode, we will be delving into the topic of economic potentials and opportunities in Asia, primarily in China and Japan, and how investing in these regions can become complex and tricky to navigate. We have Yoshi Ohira, CIO of Luxence Capital, with us in this episode, and he will be sharing how Luxence Asia Fund and other equity managers have played a very pivotal role in assisting our clients in navigating these markets very smoothly. 

Thank you, and we hope you will find these conversations insightful.

Transcript

Intro
Hello and welcome! You're listening to the Lighthouse Canton Insights Podcast.
This series is brought to you by Lighthouse Canton, a global investment institution that provides wealth and asset management services to accredited investors. Here on this podcast, we'll be shining a light on the market developments and share strategic insights to help you navigate the global investment landscape.

In each episode, we'll be bringing new conversations from leading experts in various views, including Lighthouse Canton's own investment team and specialists.
This podcast was recorded on 22nd June 2023 and was prepared based on the information available as of the date of recording.

Please stay tuned for the important information at the end of this episode.


TJ
Welcome everyone and thank you for joining me on this podcast. Today we will be delving into the topic of economic potentials and opportunities in Asia, primarily in China and Japan.

Now, in the midst of the current climate clouded by economic uncertainty, especially in regions like the US and Europe, it has been increasingly crucial for investors to explore promising opportunities within other markets.

Today, we will draw our focus on two key markets, like I've mentioned in China and Japan, both offering unique value propositions in the realm of equity investments.

We all know China faced significant challenges with its Zero-Covid policy and the ensuing lockdowns, which resulted in a downturn of almost 20% in its equity markets back in 2022. The reopening of the Chinese economy has effectively sparked a new interest in investing in the region again.

Some of the key factors that are driving these opportunities would be the fact that Chinese equity valuations are cheap, and there is a lot of room for supportive government policies to trickle in.

In Japan, the market continues to hold its unique allure for investors seeking growth opportunities. Variable economic factors, like positive inflation, after years of stagnation, present a climate that is right with a lot of potential as well.

However, investing in these regions can become complex and tricky to navigate.
Risks are abundant and therefore equity managers, like Luxence Asia Fund, have played a pivotal role in assisting our clients in navigating these markets very smoothly.

I am very thrilled to have Yoshi Ohira, CIO of Luxence Capital here with us today to talk more about the firm's view on the opportunities as well as risks he sees pertaining to Asia.

Yoshi, welcome to our podcast. Would you like to start by giving us a brief introduction about yourself as well as Luxence Capital?


Yoshi
Hi TJ, thank you for the introduction. My name is Yoshi Ohira, and I am the CIO of Luxence Capital. And yes, I have spent over 15 years of hedge funds in Asia mainly focused on Japan and China, and right now I’m running Luxence Capital Hong Kong.
 
This is Asia Longshore Locust Fund. Our expertise is in Japan and China. We are focused on engagement strategy where we closely work with senior management of large-cap corporations in Japan and China.
 
Our team comprises four very experienced professionals: two in China, and two in Japan. We have access to senior management on the ground and this is where we find insight and the outlook for both the two largest economies in Asia.
 
The good thing about having looked at both countries is that we are flexible in our location in China and Japan for looking for investment opportunities, and therefore less bias for either country, then we can objectively focus on where we see more opportunities that are attractive on the investment side.
 
And through our deep dive bottom-up approach, we get detailed information and having two countries, we can do cross-diligence, we can compare which countries, for example, most of Japanese [companies] compete with China, and China is trying to catch up with Japanese companies, so we can have a deep dive with diligence.


TJ
Thank you so much Yoshi for the kind introduction. Let us talk about China first. We all know, like I’ve mentioned earlier in the introduction of this podcast, China's reopening has sparked some form of hope and optimism in investing in this region again. However, that has turned out to be quite the opposite, with sentiments still thin. And the rebound, which a lot of investors like ourselves were hoping for, has been kind of lacklustre.
 
How do you react to this, and do you think that the recovery story remains intact?


Yoshi 
Yes, I think we expect the recovery [to be] still intact. We did start the year very optimistic, as you mentioned, hoping China to recover post-reopening. But unfortunately, it's been slower than expected. On top-down, I think China is still stimulating. If you look at the M2 growth, it's staying strong, 11-12% year-on-year. 
 
And if you look globally, US, Europe, and Japan are slowing the M2 growth, so China is the only country that has high growth top-down. However, these are mainly going to consumer savings, and not spending. I think this was the disappointment that happened in March, April, and May. 
 
However, if you look at the valuation of Anxin or Shanghai, it is coming to the growth level again that we saw last October. 

Last October, we became more positive about China, and right now we see similar situations, because the valuation is quite cheap, and it's still growing. So, what we have done lately is basically ‘gross-down’, taking smaller gross but higher net, so we have prepared for any rebound that can happen.


TJ
No, Yoshi, I think I absolutely agree with you there. I mean, while there are negative sentiments, potentially serving as a near-term gateway into any meaningful rebound, 
I think the longer-term rhetoric remains that, especially when you're looking at super cheap variations right now.  
 
And what you’ve mentioned, the fact that China is not facing some of the economic problems that other parts of the developed market are facing today, namely inflation – that has created a lot of room for the government to roll in stimulus and support the market, so I don’t disagree with you there. 

Now shall we shift our focus towards Japan? It has been increasingly evident that the region has come under the spotlight in recent months.
 
Can you give us a little bit of colour on the current excitement that investors are seeing right now and share with us more about the opportunities that you are seeing?


Yoshi 
Yeah, absolutely. As we cover both Japan and China, we have the luxury of shifting between two countries, and right now we see a lot more opportunity in Japan. 
 
I think there are maybe five different reasons why investors are getting excited in Japan. 
First and foremost, we are seeing a wage hike. For the first time in 30 years, we saw Japan’s wage hike exceeding over 3%. 
 
And I think this explains why topics like Nikkei is hitting their 33-year-high because, for the past two or three decades, it has been deflationary, but now we are finally seeing the regime change. We are still not confirmed, but it is exciting, at least at the start. 

On top of that, we had the Covid lockdown, and that's where you're seeing the reopening. As the wage hike continues to increase, we see consumption improving post-reopening. This is also positive for the domestic consumption sentiment.
 
And on top of that, despite this strong demand for recovery, the Bank of Japan continues to support easy monetary policy. This is very different from the US, which is containing and continuing to raise goods. As a result, you continue to see an interest rates gap between the US and Japan, which triggers [a] weak [Japanese] Yen. We saw [Japanese] Yen hitting 1.42 and this will be positive for the exporters.
 
And fourth, we are seeing more change in corporate governance reforms. This started in 2014 in Abenomics, and we are seeing the second wave, where Tokyo Stock Exchange is telling companies to trade above one kind of stock.
 
There is nothing Tokyo Stock Exchange can force, but given the culture of Japan, when one company starts to obey, everyone else does. So, you are starting to see a record buyback and an increase in dividends.
 
And finally, foreign investors are starting to catch up. I think everyone saw [Warren] Buffett is investing heavily in Japanese trading companies, but this has triggered many interests. If you look at the price-to-book or PE ratio, it is much cheaper than the US, and we are suddenly seeing a flood of foreign investors. We saw a ten-week streak of foreign investors buying in Japan. This is quite an interesting opportunity. During the Abenomics, foreign investors continue to buy in Japan for 18 straight weeks, so it looks like we're still more to go and hopefully this will continue.
 
So I think there are five interesting changes happening in Japan, and all of a sudden, people start to realise that this could be an interesting opportunity.


TJ 
I understood, Yoshi, and just to sidetrack a bit, I find it funny how when it comes to the US or Europe, everyone seems to hate inflation, but in Japan, it seems like it's the other way around, but now we are seeing that there is inflation again. 

It's ironic, but I completely understand where you're coming from.


Yoshi
Yes, I think the most interesting comment is the D.O.J. Governor Mr. Wither. He’s been meaning to say that the cost of overshooting in Japan is relatively cheap, than cost of claiming too early.

I think this comment says all and quite a stark difference from the US and EU central banks.


TJ
Yes, I don’t disagree there, and just going back to where we were, while it's clear that you are seeing opportunities within the two Asian regions – China and Japan – we also understand that where there are opportunities, there are also risks that are abundant, and we would like to know more about some of the pitfalls that your team is mindful of, and how are you managing those risks in balance with the opportunities that you see.


Yoshi
Yes, I think China’s risk will flag this point in the recovery has been slower than expected, and we are not seeing stimulus yet. However, as we discussed before, China remains quite cheap. It is definitely of value. We are cognizant of the foreign investors who continue to sell in China due to geopolitical risk.

I think this is the biggest risk that is hard to control, so we are running long shorts. I think this has been long and short in China, but at this point, we do see a lot of upsides in China as well. [And] given how cheap and easy it is in trading, even though gross may be double digits, a lot of companies are trading single-digit PE.

So that's why we are keeping a gross exposure small and taking relatively higher net and getting ready for the rebound.

And I think for Japan, macro risk has been well-aware. Ageing society – that has been flagged for the past 20 years. And I think this was what caused the deflation, and also the debt-to-GDP, the high debt number has been quite a concern for Japan.

But at the same time, Japanese [people] have a lot of savings, and this kind of cancelled out. So, I think the macro risk, the most difficult thing is an ageing society.

And if you look at Japan, it's interesting that now robots are making robots. So, this is both a risk and an opportunity. We see strong growth for robotics companies, and this has been working well. And I think this is the only way Japan can survive.

And this, recently, people were talking about AI and increasing productivity. This is another area where Japan can benefit, where it's been a huge risk, where a number of labour forces have been shrinking. But now you are starting to see the opposite, where productivity may be kicking up due to technological support, and we can see an interesting opportunity going forward.


TJ
I understand, Yoshi. You kind of mentioned a couple of times the concept of gross and permutating them, as you see fit, based on the opportunities and risks that you see.

For the benefit of our listeners, would you mind just sharing a little bit more colour and explanation on managing your gross and net, and in accordance with those opportunities and risks?


Yoshi 
Yes, typically for long-short funds like ourselves, we have both long, which is buying the company, and short: selling the company. 
 
Let's say, if you're net-neutral, you buy 50, you sell 50, and 50 minus 50 is zero. Typically, we take net exposure around 30 to 40, so we will buy 80 and sell 50. The difference of that 30 will be the net exposure. 
 
And the gross exposure is, let's say you have 100 million, then you can use a margin to invest more than 100 million, and let's say if you invest 150 million on principal, or 100 million, you take in gross exposure of 150.  

So, the way we think about China is if you take too much leverage in this market, it is difficult to navigate, because who knows what could happen to geopolitical risk right now. So that's why you reduce your leverage, but you increase the buying side, so that you have more exposure on [the] upside when [the] market turns. This is how we control the risk on the downside.
 
If we take higher leverage, and let's say tomorrow, say Mr. Trump will anything negative on top of Biden following China and Xi Jinping, it would be definitely negative to geopolitical tensions, and that risk is very difficult to mitigate for the investment style like we do – from the bottom-up – and this is exactly why we keep the leverage. The growth exposure is small right now.


TJ
Thank you so much Yoshi for sharing that. I think it's very important to understand the concept of a long-short strategy. I think that's what makes managers like yourselves very unique, because markets like Japan and China, where there are a lot of complexities in the markets? Taking on those opportunities in a straight line may not always work, and the fact that you are able to take meaningful short positions allows you to effectively benefit and monetize from potential pitfalls that may materialize along the way as opposed to a long position in time.

I hope our listeners can appreciate it. In the interest of time, maybe let's move on to the final segment of the podcast.

While both Japan and China are seemingly isolated opportunity sets, how do you foresee the rest of the global economy impacting your teams?


Yoshi
Yes, this is definitely something we looked at closely. We are not the macro specialists, but also the countries that we speak to have certain exposure to US markets or Europe markets, as they are exporters. And if you look at the example, for China, TMI, it's been quite disappointing lately, and this is partly coming from a weak export to Europe has been suffering.

And if you look in the U.S., there are very strange macro data coming out. The overall macro has been slowing down. FedEx reported the number yesterday – the result was quite weak. But the housing stars has been resilient, and it simplifies on the upside, despite the rates being very high right now.

So you are seeing very mixed data on the macro, and it is something that helps [you] to have a biased view, on the upside or the downside. So, we are taking and monitoring the data right now, and if you look at China, again, the M2 growth has been strong.

So potentially, we could see decoupling, where the US continues to slow, and China starts to recover if the stimulus package comes. So that's something they will be closely paying attention [to].

And for Japan, if you look at the GDP growth or the wage growth, it is now running one of the highest among other countries. This is quite surprising and never happened for the past 20 years and again, maybe that's why foreign investors are getting excited in Japan, and we need to see how sustainable this is. So, we'll definitely keep monitoring these data points, which will affect our investment situations.


TJ
All right, thanks Yoshi for the wonderful insights. I think we've come to the end of our podcast. First and foremost, thank you so much for taking the time to share these insights with our listeners. We'd like to just wish you continued success as you navigate these landscapes in both China and Japan for the years to come.

And to our audience, please feel free to reach out to our team, should you have any questions regarding the content covered in the podcast today. Or if you require any more information on Luxence Asia Long-Short Fund, please do reach out to us as well.

Thank you everyone.


Outro
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