China will turn to robotics to increase its manufacturing power and Japan is going to benefit, according to Kenichi Amaki.
The Citywire + rated manager, who runs the Matthews Asia Fds-Japan fund, said China is making more cars and turning to robotics to automate manufacturing.
As a result, Amaki said, Chinese companies need components, such as semi-conductors and silicon chips, and are buying them from Japanese companies.
'China is investing a lot in their home-grown chip manufacturing industry today, while semi-conductors are their largest import product. They import roughly twice as much as oil for semi-conductors.
'Naturally they want to create their own home-grown chip manufacturing industry and we are seeing record levels of orders for chip manufacturing equipment,' Amaki told Citywire Selector.
'That also leads to further demand for factory automation, because you can't have people handling wafers, they have to be handled by robots which all operate inside a clean room.
'That will further increase the use of robotics in factory automation within Chinese manufacturing. That is still a huge a huge potential over the next two to three years.'
Amaki’s largest sector allocation in the fund is industrials at 23.6%, while also having 9% in IT. Amaki said Japanese companies can hold their own in IT manufacturing despite the rise of production in some emerging market countries.
'When it comes to equipment and consumables that are required for semi-conductor production, Japanese companies are still very much dominant in these areas,' he said.
'Chip making itself has moved to Korea and Taiwan, but when it comes to the actual ingredients that are used, starting from the silicon wafer to the various chemicals and gasses, a lot of them are still made in Japan.'
Away from manufacturing, Amaki has 16.2% of the fund allocated to financial companies. Echoing other Japanese equity managers, Amaki has added to financials over the past six months due to cheap valuations.
Financial companies in the fund include Mitsubishi UFJ Financial Group (4.0%), and Tokio Marine Holdings (2.7%), although Amaki stresses these are short-term plays on the market.
'I would characterise these as tactical in nature. When I say tactical, it is going into it with a one to three year time horizon, and it is a little less than 10% of the overall portfolio. My tolerance level for this kind of tactical position sits around there for the fund,' he said.
'I don't expect a lot of growth from the banks, but in terms of the valuation argument is hard to ignore, especially when banks of similar quality and earning potential in the US and Europe are trading at much higher price to book multiples, the Japanese banks do look quite cheap on a relative basis. That is the rationale.'
The Matthews Asia Fds – Japan fund returned 1.82%% in yen terms since its launch in April 2015. This compares to a fall of 0.32% by the Topix TR over the same period.