It has been one year since the Great East Japan Earthquake. The earthquake and tsunami that followed killed over 15,000 people, rendered more than 320,000 homeless, and caused approximately US$200 billion in damage, making it the most expensive natural disaster in history. Japanese companies lost production capacity, faced serious supply chain disruptions and dealt with a serious electricity supply shortage. Throughout this tragedy, the Japanese have demonstrated perseverance, civility and self-sacrifice. Their efforts and achievements in getting the country quickly back up on its feet have attracted worldwide admiration. However, the country and its citizens still have much work to do.
Japan is one of the most heavily indebted countries in the world. Its aging population diminishes the ability to overcome huge fiscal deficits and, for the first time in more than 30 years, Japan is running a trade deficit. The challenges are made more serious by the insular Japanese culture which values consensus decision-making, loyalty and dedication to traditions. While these values can be virtuous, they are also caveats. In particular, the Japanese can be unwelcoming to outside influence and are slow to adapt to change. As Japanese companies seek growth outside their home markets and deal with the relentless rise of Chinese and Asian competitors, these attitudes must be overcome.
In March, the Burgundy Asian equity team travelled to Japan and visited 36 companies, 18 of which are holdings in our broader Asian equity portfolio, accounting for more than 50% of its market value. While life in Japan is mostly returning to normal, there are still a number of challenges facing the Japanese economy. Macroeconomic uncertainty persists, including great reservations about the strong Japanese currency, the European sovereign debt crisis and slowing growth in emerging markets.
As long-term investors, our focus is to understand how companies are dealing with these challenges. We want to better understand the current competitive environment, including market share changes, pricing trends, regulatory threats and other major risks. We also want to better understand companies’ competitive advantages, what they are doing to expand their competitiveness, and how they are dealing with the adverse macroeconomic environment. While most investors focus on short-term earnings trends, Burgundy focuses on management’s business expectations three-to-five years ahead, with a particular attention on any aspects of the business that management believes is being overlooked by the stock market at large. Unappreciated or unknown companies are opportunities for long-term investors; we have found many of them in Japan, and they are bouncing back from the global financial crisis and devastating natural disaster that struck one year ago. While there are those who believe in efficient markets, we are not among them.