Japanese corporate giants have been exhibiting robust earnings growth, capturing the attention of discerning investors. A key differentiator setting these firms apart is their conservative management approach, a stark contrast to the often aggressive tactics seen in U.S. companies. Japanese firms are characterized by their long-term strategic planning, creating a fertile ground for investors in pursuit of stable, uncorrelated returns. However, it is crucial to acknowledge that our investment exposure remains measured, as the improved business climate in Japan is not devoid of industry-specific hurdles.
The Role of Trading Companies
In 2020, our investment focus shifted towards two eminent Japanese trading firms: Mitsubishi ($MUFG) and Mitsui ($MITSY). These entities, central to global commerce, act as intermediaries in international trade, expertly navigating the complexities of buying and selling a diverse array of products across borders, without direct involvement in their manufacturing.
These investments were not merely asset acquisitions but strategic proxies, providing a broader exposure to the fluctuating world of commodities and shipping. The year 2020 witnessed a surge in these sectors, primarily fueled by supply chain disruptions. While our analysis indicated that these upward trends were ephemeral, by the time our investment strategies were formulated, the peak benefits had largely been realized. Nevertheless, Mitsubishi and Mitsui presented an intriguing opportunity. Despite their strong correlation to shipping and commodity prices, their market valuation was disproportionately low, trading at only 6-7 times earnings at the time.
Our Investment Thesis
We previously believed that these trading companies, with their vast data reservoirs and resources, were uniquely positioned to capitalize on market trends. Their agility allows them to dynamically shift focus away from diminishing opportunities. This flexibility is a stark contrast to companies solely dedicated to a single commodity or shipping, which are often shackled by inflexible, long-term costs and cannot pivot as market conditions change.
An additional aspect enhancing the attractiveness of these firms is their dividend yields. When juxtaposed with their equity appreciation, Mitsubishi and Mitsui, both offering dividends at 2.5%, stand out in the market. This yield is particularly appealing in the current economic landscape, providing a balanced blend of income and growth potential.
Mitsubishi and Mitsui are exemplary in their multi-faceted operations, spanning an impressive array of sectors. Their involvement ranges from energy and metals to sophisticated machinery and chemicals. This diversification strategy effectively mitigates risk and maximizes opportunities across various market segments. Their comprehensive global networks offer them an extraordinary advantage, providing insightful market intelligence and expansive access to resources. These conglomerates are more than participants in their respective supply chains; they are pivotal contributors to their stability and efficiency. The agility ingrained in their business models empowers them to nimbly navigate the ever-shifting tides of global market conditions, an attribute that is invaluable in today’s unpredictable economic landscape.
Mitsubishi $MEFG: Mitsubishi is directly involved in the manufacturing process in several industries, including aerospace (including aircraft and rocket manufacturing), automotive (components and engines), shipbuilding, energy (including power generation systems), and machinery.
Mitsui ($MITSY)- Mitsui & Co., Ltd., part of the Mitsui Group, operates more as a general trading company (sogo shosha) and is less directly involved in manufacturing compared to Mitsubishi. Mitsui’s primary role is in trading, investing, and facilitating business operations across various sectors. However, it does have involvement in manufacturing through investments and joint ventures. Mitsui has investments in companies and projects involved in the chemical industry, iron and steel, and other manufacturing sectors, but its role is typically more in the realm of management, investment, and logistics, rather than direct manufacturing.