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Q&A: 10 Questions for Schroders’ Andrew Rose

The fund manager shares his thoughts on opportunities in the Japanese stock market

David Brenchley

 

Each issue of  Morningstar magazine closes with “10 Questions,” a wide-ranging question-and-answer session with a proven investor.

In October 2018, I interviewed Andrew Rose, a fund manager at Schroders. Rose has been part of the Japanese equity team at Schroders since 1981, working in both Japan and the United Kingdom. Rose worked in London as joint head of Japanese equity in 1999, before returning to Tokyo in 2001 to head the Japanese equity team. He is currently based in London, where he manages funds including Schroder Tokyo, which has earned a Morningstar Analyst Rating of Gold. Rose holds a degree in Japanese and politics from Sheffield University and a degree in international economics from Kobe University.

Q: Why should investors allocate to Japan now?

Rose: The economy is reasonably robust, policy is accommodating and politics stable, profits in aggregate are growing, valuations are relatively attractive, and shareholders should benefit from corporate governance improvements. Overseas investors have been net sellers of Japanese equities in 2018, whilst the central bank has been a net buyer of roughly the same amount. The market would benefit if overseas flows were to reverse.

Q: Where are the best opportunities in Japan today?

Rose: Our approach is bottom up, but in broad terms there are attractive opportunities in some of the cyclical parts of the market that have sold off in 2018, such as factory automation companies. Financials also look attractive.

Q: What are the biggest risks?

Rose: Mainly external. A slowdown in the Chinese economy or escalation of trade tension would be negative. The yen is still viewed as a “safe haven,” so macro developments could lead to a stronger currency, which would represent a more challenging profits backdrop. Japan is a net oil importer; were prices to continue rising, this would be problematic for parts of the market. A hard or no-deal Brexit is a risk for specific industries.

Q:  How are valuations in your opportunity set?

Rose: Overall, market valuations are at least as attractive as major Western markets and significantly lower than the U.S. Balance-sheet-based metrics, such as price/book value, look especially attractive. The market also yields just over 2%, based on still relatively low payout ratios.

Q: Shinzo Abe will become Japan’s longest-serving prime minister in November 2019. What will his legacy be?

Rose: The initial grand expectations of structural reforms have not materialized, but nominal GDP passed its previous peak and has continued to grow. Inflation is positive, having been negative for most of the previous decade. Labor market reforms are leading to increased female participation and foreign worker employment. He has been the driving force behind increasing Japan’s attractiveness as a tourist destination. This has been an unqualified success.

Q:  Will inflation reach the Bank of Japan’s 2% target?

Rose: I have been surprised at how long it has taken for tightness in the economy, especially the labor market, to feed through to higher wages and inflation. It is now finally happening but not to the extent that we are likely to see 2% inflation on a sustainable view.

Q:  Where would you be working now, if not within financial services?

Rose: At the same time as I wrote to Schroders upon completing a post-graduate degree in Japan, I also wrote to some Japanese and U.K. companies involved in cars, shipping, and food. I’m lucky and grateful that Schroders read my letter!

Q: What do you enjoy doing when you aren’t investing?

Rose: I enjoy “working” in my garden, which includes a traditional Japanese garden in one corner, as well as walking and watching sport.

Q: Where did you go on your last vacation?

Rose: We drove our son to the south of France as part of his university study abroad year and then drove back up through France in leisurely fashion.

Q: What book is on your bedside table?

Rose: Shoe Dog, by Phil Knight, who founded Nike in the 1960s by selling shoes manufactured in Japan into the U.S.

This blog post is adapted from an article that originally appeared in the December/January 2019 issue of Morningstar magazine. Read the full article.

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