Bloomberg Audio Studios, podcasts, radio news. How's Hong Kong?
It's okay, we're uh, we're perking along here. It's uh. It's feeling a little bit better, you know, the last week or two here than it did for much of the second half of last year. Have you.
Have you watched the ex Pats? No, I'm debating.
Categorically, I categorically refuse to do so.
I think I'm gonna watch it once all the episodes are out, just for nostalgia value. But yeah, I have heard mixed reviews.
Yeah, it's it's it's uh. I objected to the way they you know, they did it, and I objected to I was sure I was going to object to certain portrayals and the I bet I'm not going to be surprised.
Joe, did you did you know about that?
What is the expert?
So this was a.
Huge thing in Hong Kong where during the pandemic they let Nicole Kidman in like without having to go through quarantine in order to film scenes for the show, which is all about expats living in Hong Kong. It was like a huge controversy. Everyone was so annoyed about it because it was it was just such an obvious double standard.
I did a deadlift one.
Okay, so many uh barges.
This isn't after school special, except.
I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.
Where's the best posta? These are the important question.
Is it robots taking over the world? No.
I think that like in a couple of years, the AI will do a really good job of making the odd launch podcast, And people say, I don't really need to listen to Joe and Tracy anymore. We do have touching, the perfect welcome to lots More, where we catch up with friends about what's going on.
Right now, because even when add Loots is over, there's always lots more.
And we really do have the perfect guest.
It seems like it's fun to be an investor in the Japanese market again.
But after like thirty five years, Yeah, you had to wait a while. I think stocks for the long run, right the nie K I think recently on some measure broke it's nineteen eighty nine. The infamous nineteen eighty nine peak is back, so yeah, there it is. There's the chart. I just pulled it up on my terminal. Pretty impressive.
Travis, isn't fun? Has it been enjoyable?
Uh? Yeh yes, and no, partly, you know, being in Japan, you're you're constantly and I'm not in Japan, I'm in Hong Kong, but being you know, involved in the Japanese market, you're constantly told, well, you know, the Magnificent seven, they were up, like, you know, seventy three percent last year, how about you? And then okay, well Japan's up forty
percent and the S and p's up less. Okay, but yeah, but that's in yen and you know, the dollars strengthened against the end, and so there's there's always some naysayers here and there. But yeah, it's been okay, and there's been a lot of changes and those changes have really been rewarding for those of us who've been watching and waiting for these changes to manifest themselves more publicly. Yeah.
So we are speaking to Travis Lundy. He is, of course, repeat All Thoughts guests and a special situations analyst who publishes on smart Karma. One of the smartest people I know when it comes to both markets and general trends, I guess in Asia based out of Hong Kong, but you have a lot of historical experience with the Japanese market right. In fact, this is sort of your bread and butter corporate Japan, special situations, big events in that market.
Yes, I've been involved in the Japanese markets for twenty plus years. I lived in Japan for twenty plus years. I moved to Hong Kong for a job and I'm still here, but I do a lot of my work related to Japan.
So this is the thing that you hear. The thing is, you've been hearing it for a while, So this is why I'm not entirely satisfied. But a thing that you hear is, oh well, suddenly corporate Japan. Management in Japan have become much more focused on returns or become more shareholder friendly, et cetera. I guess there was this perception at one point, you know, and that management in Japan for a long time ran the business for management or insiders, and now they're running for.
Sharehold first, salary men for their employees.
Is this true? Is there is this actually a phenomenon that's changed.
Yeah, it's changed quite a bit. It really has. And part of this is if you go back to the history, you know, back in sixteen forty two, seriously, the post war, you know, the occupation administration broke up the Zybots, but they were afraid of communism, so they allowed, you know, they allowed the corporate groupings to reform. Instead of vertically, they allowed them to reform horizontally around banks and financial institutions.
And a bunch of the shares in corporate Japan were handed off to individuals, but individuals then sold over the years and there were no buybacks, but the financial institutions just accumulated them. So by the mid eighties, financial institutions that is to say, banks, trust banks, regional banks, life insurance companies, property and casualty insurance companies, and then of course corporations, they held two thirds of the market, which is just nuts, right. Since then it's gone way way down.
And part of this is, you know, banks support you know, companies. They a company has a need to invest capital, so they go borrow some money from the bank. The bank says, here, I'll buy some warrants too, and the warrants become shares. Okay, Now you IPO a subsidiary of a major company, and that subsidiary has you know, you know, three different insurance companies, three different banks, five different supplier partners, ten different customers
already as shareholders. They sell some off to retail, but it's still eighty percent you know, corporate and finance, and this is part of society. You know, cross holdings wasn't some you know, malicious thing designed to keep out you know, voting shareholders. It was really, you know, let's go all do this together, support each other, be nice and friendly. And suddenly became rude to sell. You know, why would I would sell this in order to go make money
for myself. You know, I'm part of a society. I'm just going to support this now. Eventually, you know, they started selling down because they needed to. There was a you know, we nineteen eighty nine, and then you know, by nineteen ninety eight, we were you know, half half off. And you know, there was a banking crisis in the late nineties that persisted through the early naughties. A couple
of brokers went the bust in the late nineties. A couple of insurance companies went bust in the early naughties, mostly because they held too many shares which had gone too far down that and real estate obviously, and you know, the shares started going down, and the banks and insurance companies in corporate started seeing this is kind of an existentialist risk, so they sold shares, and you know, those shares ended up in the hands of foreigners, retail and
more public shareholders engended more questions about what management was doing.
So one of the things I'm curious about is what the proximate trigger is or was for this new found I guess like investor slash return focused idea in Japan inc. So you know, when it comes to Japan, I think I can remember, like for decades, almost everything touching the Japanese market and economy tends to be discussed in almost
cultural terms. It's kind of weird, but like people were always debating whether or not the culture of the Japanese economy could change, whether or not it would be more open to things like imported labor immigration, or whether that was just impossible given attitudes towards foreigners, but also whether or not the I guess the sort of like internal focus of companies was down to a different type of societal value, so more of a collectivist society versus maybe
the rampant individualism that we see in the US. So what was the change here because people were kind of like dismissive of the idea that this could happen for a long time.
I think a couple of things. First was, you know, when the dollar yen went from one hundred and fifty and nineteen ninety to seventy nine in nineteen ninety five, all of Japan Inc. Which produced in Japan and sold abroad, you know the giant XP machine, and they lost huge, huge sums, and so all of the Japanese companies they set up production bases abroad. So now you have you know, Toyota making America cars in America sold to Americans, and
you know, Japan turned the demographic corner. Japan was much slower to come back after its banking crisis than you know, the US was after its own banking crisis in the eighties.
And you know, Japanese, the Japanese business of Toyota didn't make nearly as much money as the US business, So you know, profits piled up abroad, and you know, companies became cash rich because companies had found that they were unable to borrow when they needed to invest simply because the banks were too weak to lend too much money, and they were always afraid of lending to companies who had a plan rather than companies who had assets to
back their loans. Companies started to hoard cash. They hoarded cash, and they hoarded shares. Shares were not more to market, and so they became a rainy day fund. And as long as they didn't get hit, you know, you were okay. Go down fifty percent, you have to impair them, but as long as they don't go way way down, you're generally okay. So they became a rainy day fund just because they needed to hold on to this stuff to be sure that they had access to money when they
needed it. And so we kind of went through the naughties. Japan you know, came through the GFC better than you know, most people, I think, And then there was a push towards increased stewardship and increased corporate governance. Part of this was, you know, based on the Scandinavian experience, where some of the pensions decided to go whole hog on better stewardship and better corporate governance, pressuring companies back in the late nineties,
the UK did so in the early naughties. The Tsee set up a corporate governance code in two thousand and four, which nobody will remember and nobody ever paid attention to. The UK set up more of a stewardship code and more of a corporate governance code. As time went on there were more reports about the effectiveness. Japan copied that and set up a stewardship code in a corporate governance code after much you know, back and forth in the political arena, and it finally got there in the just
after mister Abbe was elected in late twenty twelve. It showed up twenty fourteen and the Corporate Governance Code in twenty fifteen. There was pressure people saw it. It was finally you know, starting to push.
From what it sounds like, you know, I started in the beginning with my cynicism as like, oh, you always hear this. It's like Japan is turning the corner on share on you know, management styles and corporate governance, et cetera. What it sounds like is actually all that's been true. It's just a very long process. So there's the long process of the sort of diminution of the cross holdings, the long process of the various expectations at the TSC,
et cetera. So all of it was always true. It just takes a while for these things to sort of come to Fruce.
That's yeah, that's exactly right. And you know, we hit Japan hit bottom in twenty twelve when the dollar yen was super low and it's been up since. You know, we've had a four bag or five bagger in the nike A in twelve years. Call it so, and that isn't that bad. You know, it's been in end terms, which means it's less than dollar terms. But that's where
we started from. And we had to come up the hill through abenomics, through a bunch of different privatizations, to get some leadership examples out in the publics so that the media could point to that company, that company did something good. And the hint that everyone's supposed to take is I should be more like them.
I under stand that. You know, at a high level, there are examples of shifts in Japan corporate governance, so you know there are actions being taken at a sort of like executive slash strategic level. But I kind of wonder how much that filters down to day to day business because I remember a lot of my friends from high school in Tokyo, you know, they stayed in the
city and they went to work for Japanese companies. And admittedly, the last time I spoke to them, a lot of them was pre pandemic, so this would have been like twoenty nineteen or twenty eighteen, and so many of them were just miserable, Like the working culture was terrible, you know, gender dynamics were terrible. I just wonder, like how much of that aspect of Japan's corporate culture has actually changed.
That's actually changed a lot, and it changed a lot in you know, post GFC in part because you know, companies weren't making any money, and Japanese companies didn't want to pay overtime, and so one of the things is, you know, you pay overtime and eventually people end up with a little bit more cash in their pocket. The manager, you know, his job is to take out the subordinates. They all go to some bar and you know that's
where they end up at the hostess bar. But they no longer had any money and Japan really, you know, when I arrived in Japan in nineteen ninety. You know, this was Julianna's Tokyo. Actually they went under just before that, but you know it was really you know, Japan's great, Japan's fantastic, Japan's the top of the world. We will conquer the US in five years. And you know, Hong Kong was much like that when I arrived in twenty eleven.
But Japan, you know, took us, you know, a step back, and they really, you know, fifteen years of being beaten down economically speaking, you know, household incomes not going up, asset prices going down, real estate prices going down. People decided that, you know, leisure, hobbies, foreign travel, all of
this is much more interesting. If I'm going to have a job which really stinks, well, guess what, I'm going to quit that job and I'm going to go work for a foreign company where I'm treated better.
Trevis is a lot of that you mentioned, the importance of you need some company to do it, and then everyone wants to emulate them. So some company takes some actions, the stock goes up, people shareholders get rich. Another shareholders want to get rich. Which company did that in Japan? Who is that prime mover?
That's a good question. The example which was perfect here was when the when the Tokyo Stock Exchange and the FSA changed the Corporate Governance Code. This the first time, you know, after the original. They made an amendment to it, one of the general principles which said, if you hold corporate crossholdings, you are obliged to check them every year to see whether you need to hold them in order to do business. And strictly speaking, you should never need
to hold crossholdings in order to do business. You should be able to do business with partners all the time anyway, and no company should restrict other companies from you know, selling their shares. That withholding business as a threat would be a really bad thing. So they put that in there and then they said, okay, we're going to do this.
As an example, then CSE owned four point nine percent of the Singapore Exchange and they you know, they made a little presentation and says, well, we've decided, we've talked
with the Singapore Stock Exchange. We've decided we don't need to do this, but we'll have a continued good relationship with them and partner on products and services, and so we've decided to sell one third of our stake every year for the next three years in order to not disrupt the market and not cause market you know, consternation, and we will apply the proceeds to you know, improving shareholder returns. And that was the example, just as they
changed the corporate Governance Code. You know, since then, we've also seen activists coming in. Actually a perfect example, an absolutely perfect example is Tokyo Electron. In twenty thirteen to two thousand five fifteen, there was a long running merger negotiation and approval process between Tokyo Electron and Applied Materials in the United States, and they ran a similar business. And you know, Tokyo Electron was always kind of stodgy.
They held some cross holdings, they held a lot of cash, and they kind of built their business in a certain way. And they spent you know, basically the better part of two years talking to AMAT and they walked out of it, and the deal broke. The DOJ you know, blocked it, and it was announced at the end of April twenty fifteen, and they came out and said, all right, we've learned so much in the process of two years. We're going to completely change our business.
Why I'm just looking at.
Them a going up as a ten bagger, right, So yeah, they basically said, you know, they said, we're going to concentrate on our customers in a different way. We're going to have a different dialogue with our customers, much the way Amat has a dialogue with their customers. We're going to take all of our extra cash, we're going to
buy stock back. We're going to set a minimum payout ratio of fifty percent, so every quarter or every half, you know, we're going to pay out exactly half of our earnings, so you know what you're going to get as a dividend, and we will strive to produce more shareholder return. It wasn't noticed at the time, but you know, people noticed it later and the stock is way up. Other companies, you know, took a less good governance stance
at the time, but you know they were. There were a bunch of examples, and it's slow, but it's it's kind of you know, Rolling Stone.
So speaking of people noticing, I mean you mentioned just then there's been more activism. We've we've certainly seen a lot of inflows into the market as well. And I think the fact that you know, stocks the Nicky is a record is obviously catching a lot of people's attention, but are you seeing that impacting investor behavior, Like are people responding to the market maybe differently than they once did. And I'm also thinking back to again this is kind
of a cliche, but the Missus Watsonabe idea. It used to be that a lot of retail investors in Japan would be focused on currency arbitrage because that was kind of a way of getting returns in a period of slow economic growth and the Lost decade and all of that. But I mean, now you can invest in stocks and get a return that way.
Yeah, it's an interesting question. Last year there were a lot of you know, strategist comments and a lot of you know, some of the famous japan specialist twitterati. We're commenting on how much foreign inflow there was into the market. And indeed, in the first half of twenty twenty three, we saw about four point five trillion yen come in, which was a really big thing. That was the biggest inflow we had seen in almost ten years. But you know, the second half, you know, kind of dampened it and
we'd lost one point five trillion. But if you go back twenty twenty two, twenty twenty one, twenty nineteen eighteen. You know that three trillion yen didn't cover half of the outflow during the previous five years, so it was nice to come back, but we were at no means, you know, overweight foreign exposure. The other thing is, you know, you've seen this everywhere. The rise of passive has been you know, dramatic, and that includes you know, American pensions
investing with American fund managers who manage international portfolios. A lot more of it's now impassive than active. And so we've seen a rise of passive flows and a decrease of active flows. But the activism itself depends on active investors, not passive investors, because the passive investors, you know, they just go with the thing. If it gets taken over, it gets taken over. It doesn't get taken over, it doesn't get taken over. What am I going to do?
So one investor, one investor who's out bullish on Japan and even wrote about it in his recent note, Warren Buffett, and he has stakes in five companies, and he says they follow shareholder friendly policies. Some of their Mitsubishi Mitsui's Sumitomo or Benny Tochu. I don't know if I'm pronouncing all those correctly. And he says they don't pay their
executives as much as US executive. So what is it about these companies are like, what is this opportunity or the sort of the new buffet in Japan trade?
Well, so that was a fantastic trade and the reason why it is a fantastic trade was because those companies are really great companies. They are effectively listed private equity funds. They are very competitive, They pay their young people a lot of money. They recruit very very good personnel. The personnel get trained, they enter a kind of a little pod and go forth and do projects. There's a project leader, you know, that's a flying V. Goes up in the
hierarchy for the next five or ten years. Eventually, you know, you kind of get kicked out, You get sent off to another project. Maybe you spin out and you do an IPO of a port. You take control of a project which they then invest in. But back when warren It started investing, they were able to buy the projects at or buy the company at zero point five times. Book, that's pretty good. You generally can't buy private equity funds
at zero point times fund five times book. And these guys had had, you know, a couple of years of bad returns because they were heavily invested in the oil patch oil and gas, and when you know, oil and gas was very high in twenty fourteen and got crushed in twenty fifteen twenty sixteen, these guys had to write off a lot of a lot of their investments or write down the investments. So they did, and you know, it got kind of it stayed weak for a little while.
They started buying back some stock, but they were kind of you know, underloved. But they are still very very good companies for what they do. They are very financially savvy. They are a bit like private equity because most of their investments are non listed and they actually have a fair bit more leverage than you can see by looking at their financial statements. But they just managed it well
and it got long term funding. They're super professional. And it could be that the top bosses don't get paid you know, like fifty million dollars a year. They get paid pretty well, and you know that's just part of the Japanese way. Really executives around Japan. Don't get paid stupid money. Carlo's goan was one of the examples, and he got paid ten million dollars I think, and everyone's like, oh my god, ten million dollars.
Oh Carlos going, oh my gosh, that that was such a story. I just remembered I did a TV ad for Mitsubishi. This was my other high school job, was doing like ads of various sorts, and it must have been like two thousand or two thousand and one. I think I got paid probably like about the equivalent of fifty dollars. I should have asked for.
Stock, Yes, you should have.
Yeah, that'd be not a million.
Well they went down from there. From there for ten years.
Held Tracy would have held the buy and hold investor here.
I would have. Actually, there's one other thing I wanted to ask you, which is, you know, we've been very focused on corporate Japan. But how much is this whole conversation we're having about changes. How much of this is a reflection or even a vindication of ebonomics.
I think it is a vindication of abenomics, in part because part of what mister Abe wanted to do was he wanted to make Japan conscious of its shall I call them positive attributes, where Japan had something to offer the world. He said, you know, go forth and make money. We will support you, We will you know, figure out how to get you loans that you need to do
to go, you know, spread the good word. And I think that at the same time we had the introduction of the Japan Stewardship Code, which gave you know, activist investors basically a stick to beat on companies, and then gave the Corporate Governance Code as you know, part of the the anvil, if you will. And there were simply a bunch of things which entered into the frame work which helped companies get out of some of the doldrums post March twenty eleven earthquake and end twenty eleven Thai
floods which impacted the Japanese economy dramatically. I think that it was all kind of came together to bring Japan out of what had been five year doldrums, which had been at the tail end of twenty year doldrums. And I think that he gets a fair bit of credit. But I really think that kind of a societal change which happened with a large number of inputs, and it's just as you mentioned, Joe, it's going to take time. A perfect example is cross holdings, right, we talked about
that before. Japan is effectively the world's largest long short fund. There's something like seventy trillion YEN of cross holdings across corporates, banks, property and casualty insurers. Actually seventy trillion was last year's number. I think we're probably up to one hundred trillion. Now, this is a lot of money, but basically all of those cross holdings are funded by the equity of the holders. That is to say, if the if a bank sells its cross holdings, it gets money, then it takes the
money and it buys back its own shares. Well, if you know unpack that, it basically means all of these companies and banks and insurance companies have if they've effectively shorted their own stock in order to own the cross holdings. Now that's really really bad governance. And I don't know that that Japanese companies have figured that out yet. But by the idea of saying I don't need to hold the cross holdings in order to do the business, and then I will take that money and buy back the stocks.
You know, that's really great. The thing about this is, you know, the banks hold a thousand different stocks, and every one of these cross holdings is a strategic position. This is a corporate to corporate relationship. It's embedded in the DNA of the corporates for the past decades. It's part of their business, you know. It's it's a huge
number of relationships which need to be unwound politely. You can't simply go to somebody and say, hey, you know, we've you know, thanks for all the laughs, but you know, I'm going to go sell five billion dollars a year stock in the market. I hope it doesn't hurt the stock too much. So you have to be polite about getting out of it. You have to consider how it's
going to impact the shareholders of that target company. Also, if you've got you know, some company has like fifteen different crossholders, they can try to accommodate, but they can't accommodate their fifteen different crossholders unfairly. They have to treat all of them fairly. So if all of them want out, then you know, they have to figure out how to get out of their own crossholdings. To get the cash to buy them back. So it's it's a huge enormous
logistical problem here, and this takes time. It has taken time for the past ten years. It's going to take another five or ten years. Just today we had the property and casualty companies come out with their business improvement order plans. They had a scandal last year where they had a price fixing and the FSA sided that in part of this was due to the overly cozy relationships which were caused by crossholdings. Now that's kind of garbage,
but they said it. And this is actually, you know, it's absolutely perfect for the Japanese insurance because you know, if you're out there saying, gosh, you know all my all of my shareholders are telling me, I got to sell your stock, and you know, I really don't want to sell your stock, but you know, what can I do here? And then the regulator comes in and says you must sell the stock. Then the insurance company goes to all its partners and said, you know, my regular
tells me I got to sell all my stock. It's the law. So this is you know, insurance companies are have to be super happy about this because the regulator has now told them cross holdings are bad, therefore got to sell Tracy.
My new party trick, by the way, is I'm going to say, you know, Japan is really a long short headshott masquerading is a country, and then I'm going to scratch my beard and walk away and sound very I look.
Forward to the tweet, Joe.
I'm sure it's coming, and you know how to talk about this. Otherwise, the Japanese insurers, and they're one of the really big crossholders, you know, they had to come out with their plans and they said, you know, we're going to get rid of our cross holdings as soon as we possibly can. And one of them said, you know, we're definitely going to get rid of all of them by fiscal year twenty twenty nine, which is like six years from now, so you know it's going to take time.
I don't think there's any there's no expectation that it's going to you know, they're all going to be out the door next year. And what the other interesting thing here is that if the if the insurance companies have been told by the FSA that they can't hold cross holdings because it's a danger to appropriate business practices. Well, what does that say about banks? You know, the FSA regulates the banks too, so if it's bad for insurance companies,
it's bad for banks. So we're going to see this sometime later this year, I think where the FSA is going to go into the banks and say you too, you got to do it. And you know, we're already seeing it here the last few weeks or a few months where companies and banks et cetera, they're doing huge offerings of stock out in the market. Foreigners are buying them, they're distributing the shares out to other buyers, et cetera. So there's a lot more flow here this year and
the very end of last year. So we're going to see more flow, more interest. It's gonna all happen. It's all good. It'll be good for years.
It sounds good aget Like I kind of it makes me long for the go go years of like of Tokyo and when when you mentioned this, but when everyone was like, oh, Japan can do anything in the world. Japan's great, Like it feels like we're maybe not that extreme, but coming round a bit to that again.
Yeah, I don't think we're going back that way, actually definitely not. I think that what Japan has done is they've learned to be earnest and have you know, a fair bit of humility. But also you know this abbe pri in what you can do. May not be able to do everything, may not be magnificent seven, but I know I can do the right thing. And that's one thing which I think foreign investors should get out of Japan.
And I think, you know, Warren Buffett made a comment about that there's some high quality businesses in Japan, and you know, governance is pretty good, I mean, and it's got a tailwind to it. So that's that's the right thing. And you know, there may not be a Google or an Apple here, but there's a bunch of really good stuff. Gay Electron, Tokyo Electron.
I want to take Joe to Tokyo at some point and like show you all the places I need to go out in. Lots More is produced by Carmen Rodriguez and dash Ell Bennett, with help from Moses Ondom and Cal Brooks. Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts.
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