Fidelity: Mild inflation drives the Japanese economy forward and is optimistic about the returns on Japanese stock investments.
25/12/2024
GMT Eight
Fidelity Investments stated in a report that Japan's gradual return to moderate inflation and normalization of monetary policy is beneficial for its economy and stock market. Inflation is driving Japanese companies to increase profit margins, restructure assets, and enhance shareholder returns. The firm believes that improving domestic conditions in Japan bode well for utility stocks that increase shareholder returns, as well as for automakers that strengthen valuations through cash utilization and cross-shareholding removal. The prospect of continued inflation, along with the Bank of Japan's intention to further tighten monetary policy, presents investment opportunities for interest rate-sensitive financial stocks, mainly including banks and insurance companies, especially large banks and non-life insurance companies.
Fidelity also pointed out that the construction industry remains a good choice, including general contractors, subcontractors, and building material companies. Japan's capital expenditure environment remains strong, and recovery in pricing power will continue to drive profit margin expansion, unaffected by global macroeconomic conditions. The firm's top pick is a general contractor that leads the industry in profitability, capital efficiency, and shareholder returns.
More broadly, Japanese companies are increasing investments in technology and digitization transformation to improve productivity and save labor. The firm believes that investing in IT service companies can capitalize on this trend.
On the other hand, Fidelity is bearish on semiconductor stocks. Regardless of the potential impact of tariffs, the firm is increasingly negative about the semiconductor cycle in the fiscal year 2025, especially DRAM, NAND, and semiconductor equipment. However, considering the potential revival of the global manufacturing cycle, the firm will continue to focus on investment opportunities in factory automation, especially companies with strong business models and profit recovery prospects.
Looking ahead, the firm believes that the incoming Trump administration will not change Japan's positive trajectory. If Trump can accelerate economic growth in the US, the process of inflation recovery in Japan is likely to strengthen, but some favorable trends are unlikely to change due to Trump's policies, including domestic political pressure to increase wages, pressure for companies to improve governance, and shift from hoarding cash to more efficient capital allocation.
In the future, the Japanese government may need to reach agreements with Trump, which could lead to commitments such as increased defense spending. Negotiations between the two countries could bring more favorable contract terms, potentially benefiting heavy industrial companies and creating investment opportunities.
Meanwhile, the US may impose tariffs (including on countries like Mexico or Canada), which may seem to hit Japanese companies exporting to the US, but these Japanese companies' American competitors will also be affected. Therefore, considering the production proportions under the North American Free Trade Agreement, it is expected that the cost increases for major Japanese automakers will be similar to those of their American counterparts, thus the relative competitive position is unlikely to change significantly.