by Bill Kennedy, Portfolio Manager, Fidelity Investments
Several key factors, ranging from equity valuations to energy and currency shifts, have caught the eye of Fidelity’s Bill Kennedy.
Japanese stocks may be poised to shine once again, explains longtime Fidelity investor Bill Kennedy, who welcomes the anticipated shift after a stretch of meaningful underperformance that dates back to the 1980s.
“Based on several key developments—including depressed valuations, as well as energy and currency tailwinds—I’m more bullish about the outlook for stocks in Japan than I have been in years,” says Kennedy, portfolio manager of Fidelity® International Discovery Fund (FIGRX).
In managing the portfolio, Kennedy takes a long-term view, focusing on high-quality companies with above-average growth prospects that are trading at reasonable prices. He particularly likes businesses that have stable and high returns on capital, durable competitive positions, consistent profitability, solid free cash flow generation, good balance sheets, and management teams whose interests are aligned with those of shareholders.
From a valuation standpoint, Japanese equities look attractive compared with stocks in other markets, their own historical levels, and the outlook for earnings growth, Kennedy points out.
For example, he highlights that late last year, the bellwether Nikkei 225 Index was trading substantially below its peak from 34 years ago, even though corporate fundamentals, including revenue and earnings, have held up fairly well.
Kennedy emphasizes that these depressed valuations are partly due to years of disappointing economic growth in Japan, which was further exacerbated by the country’s lockdowns amid the COVID-19 pandemic.
“During this time, however, many firms in Japan took the opportunity to restructure their businesses, resulting in improved earnings outlooks,” notes Kennedy.
Furthermore, he believes Japan has a significant advantage over Europe from an energy standpoint.
Roughly 11 years after the devastating Fukushima nuclear disaster, the country is gradually turning its nuclear plants back on, meaning it may not have to rely as much on importing fossil fuels going forward, according to Kennedy.
Kennedy believes the impact of cheaper energy should not be overlooked, as it lowers production costs, especially for manufacturers, making them more competitive in the global market.
Turning to currency, the yen is one of the weakest currencies in the world, acknowledges Kennedy, largely because inflation in the country was running around 4% in the final months of 2022, versus nearly 8% in the U.S. and close to 11.5% in Europe.
As a result, the weak yen bodes well for Japanese businesses because it means their costs tend to be much lower than those of other developed countries, he contends.
The portfolio had about 18% of its assets allocated to stocks in Japan at the end of May, its single largest country exposure, and its highest weighting in recent years, says Kennedy.
Some sizable Japanese holdings of note include multinational conglomerate Hitachi, which sold off its cyclical businesses to focus on digital applications; consumer electronics giant Sony Group; medical technology company Hoya; semiconductor manufacturer Renesas Electronics; and Shin-Etsu Chemical.
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