いただきます
Our headline is pronounced itadakimasu and is an expression used in Japan to wish good appetite, but which literally means “I receive something”. And there is a lot to receive in the Japanese market… On Friday Panasonic announced that it had sold 1.4 million shares in Tesla last year, which it had bought in 2010 for around USD 30m. The revaluation was more than 1000% and the capital gain more than 3.5 bln USD. The stock rose by 5%, demonstrating that investors did not know Panasonic had a stake in Tesla. Japanese companies normally hold an equity stake in all their listed clients, and Tesla for Panasonic was no exception. The SOPs (“Sum of Parts”) of the various analysts rarely showed this stake, even though it represented over 10% of the group’s capitalization. Japanese stocks are truly unknown and misunderstood gems. Just on Thursday we had a video call of over two hours with Panasonic. As always, they are very kind and amiable. The concept of Japanese society is as close as you can get to utopian socialism. You can’t help but like it, at least ideally. Unfortunately, it is infinitely far removed from the real nature of man and what investors value. Whether you are an engineer in a super cool industry or a poor one, you earn the same amount at Panasonic. The average Panasonic employee works 22 years with the company. A loss-making division is not closed down; its losses are offset against the profits of profitable divisions. However, things are changing. Fast. Panasonic has been divided into five divisions. None of them will finance the others anymore. The possibility of listing the battery division is no longer a fantasy. This division needs to invest and the cost of capital is very low for pure companies operating in this sector. The air conditioning and lithium-ion battery divisions alone would be worth not far from the value of Panasonic’s entire business if listed freely on the market and based on current competitor valuations. The Toshiba saga will probably from now on prevent the government from intervening or plotting in the shadows to protect large corporations and will sensitize boards of directors to the will and interests of shareholders. The barbaric 外人 (pronounced gaijin, i.e. foreigners) Americans and Europeans are quietly hoarding Japanese shares. The banquet is still intact. The yen weak and the guests distracted. It’s worth crashing. Now.
Panasonic accounts for almost 10% of the Pharus Electric Mobility Niches fund. We sold a small position on Friday so as not to exceed the 10% UCITS limit. Panasonic is the second largest stock in the NEF SDG fund (2.4%). Finally, we also have Panasonic in the Pharus Asian Niches fund (0.7%), in the Electric Mobility niche.
It was 2003.
… and I was in Brazil. The stock market there was super cheap and apparently very interesting, full of companies that could benefit from the globalisation process that had just started. Talking to an experienced local broker, I asked him what he thought of the opportunities in that market. He replied with a grin, somewhere between sad and smug, and told me ‘the Brazilian stock market is the market of the future’, then, after a theatrical pause, continued ‘…and always will be!’. And he laughed. By this he clearly meant that the Brazilian stock market will always be a harbinger of illusions but will never really give satisfaction. On the other hand, the poor man (and I say this with feeling) had worked on a market that was negative 30% at 10 years (70% in real terms) and 60% at 3 years. How I regret having brought that negativity with me, which prevented me from investing more incisively and consistently in Brazil. Over the next 10 years, that market multiplied, in dollar terms, by 10!
Let’s move forward 16 years, 2019. We are in London and, having set up Niche AM and launched the first fund, Pharus Asian Niches, we are accumulating Korean equities to which we have dedicated a Niche (Korea Reunification). Korea is a market we have followed for several years and visited several times, given the valuations and quality of its companies, the fundamentals of the country and the attitude towards work and honesty of its people. 2019 was terrible for Korea. With a world market going up Korea was crashing every day. One morning I remember a call from a broker I had known for a few years now. Based in Paris and with a lot of experience in Asia, which he was focused on. He spoke to me as one might speak to a brother. Almost in a whisper he made me realise how dangerous Korea was. And if you look at past charts anyone can see how volatile it was.
He told me how many of his clients had been burned by the country. I explained to him that we had an Asian Niches fund focused on that area and that we were very positive. He ended the call with a rhyme that he told me was famous among managers in the area: ‘too much of Korea is bad of your career’. Fortunately, we were savvy enough here to shrug, although it’s never possible to be completely impervious to statements like that, at least when they come from someone you respect and who has a lot of experience. Two years on that market is up over 70%, dramatically outperforming almost all world markets.
A few days ago I was talking to a colleague and friend who manages some Asian funds here in London for a well-known asset manager, and I had a déjà-vu. Talking about Indonesian small caps, he told me that, in his opinion, this asset class, however attractive it may be in terms of valuations, is hopeless as it lacks catalysts and buyers. Here, too, how can I fail to see the pragmatic approach that often makes the manager survive. With a bit of imagination comparable to the reaction of Pavlov’s dog. Experience helps us to survive and most living beings use it to their advantage. However, in the stock market it is not always, or rather almost never, useful, at least in the long term. Since the MSCI Indonesia Small Caps index was created (2014), this asset class has reported a total return performance in USD of -56%. Over the same period, the MSCI global small caps index has returned +102%, emerging market small caps 55%, Thai small caps 46%, Chinese small caps 56% and Indian small caps 111%. This euphemistically cautious attitude towards this asset class is hardly surprising. An asset class to which we are dedicating a Niche which occupies 10% of the Pharus Asian Niches fund and on which we are creating a pure fund.
A few days ago the World Bank came out with an interesting analysis of Indonesia (click here to view the report). It shows a country in difficulty, but with great resources to get out of it. Solid banking system. Little public debt with significant margin to increase it. Potential to attract investors through a modernisation of the government bond market. A sovereign fund is being set up, which should finally accelerate infrastructure spending. Like Japan, Indonesia has lagged far behind in its exit from Covid and the recovery of its economy. And the pressure is being felt. However, for many countries, Covid is a wake-up call to stop putting off important structural measures. For small caps in Indonesia, it could be an important catalyst for closing a valuation gap that has reached extreme levels.
Pears and chocolate
So many words poured out about inflation. Very often the market gets fixated on certain issues and the brightest minds are wasted speculating on the sex of angels. Current inflation is linked to powerful post-covid bottlenecks that create an imbalance between supply and demand. This is temporary. The real inflation is normally created by the labour market. Here the market is indeed tight for some categories, but not for most. As it was before. The protectionism we see spreading, together with the huge investments in infrastructure, should lead to some medium-term inflation in the whole labour market, including the less specialised professions, a category that has been left on the side-lines in recent years. This is positive. In addition, an easing by regulators should allow more investment by utilities and telephone companies, but also a rise in tariffs. Here too it is positive. It is vital to return to a normal level of inflation after years of deflation and inflation focused on luxury goods and very high salaries. It is a process that needs to be controlled and monitored but it remains a positive process. We should rejoice in it. And buy some value that goes well with the return of inflation. Like pears with chocolate …
