Hello and welcome to The Download. I'm your host, Dave Richardson, and we are joined by another David. It's the David & David Show this morning. David Soh, who's a portfolio manager, but more importantly, head of research for Asian Equities at RBC Global Asset Management and widely considered the best dressed portfolio manager in the world. Looking very sharp this morning, David.

Thank you, David. It's a real pleasure to be here.

I would have dressed up. I feel almost like I've insulted you in some way. So next time, I promise I'll try and keep up with you, although I'll never look that good.

I'm just trying to stay warm this morning.

Are you enjoying the Toronto weather?

It's awesome. I landed on Sunday around noon. It's warmed up a little bit since. Korea can get pretty cold as well. So this is a nice refreshing weather for me.

Well, David, before we start into our discussion on Asian equities, and we're going to focus a little bit on Japan this morning, why don't you tell us a little bit about yourself? I think this is the first time you've been on the podcast with us. So where do you live? What's your background? How did you come to be the head of Asian research at a big investment firm?

Of course. I thought I'd be a diplomat when I was a college student. I did not think about business or investment as much back then—actually, at all. But then one thing led to another. I did grow up in the US when I was in elementary school. That was five years or so, very formative years, I must say. And then returning to Korea, where I'm originally from, for middle school, high school, college, army, the works. I've been traveling around as a management consultant. So after thinking about being a diplomat, towards graduation, I realized the business world actually is a lot more impactful, possibly, for what happens in the real world and everyday people like us. So I was thinking, I want to learn more about this business. And what better way to learn about good businesses, good management, than in a boardroom as a management consultant, going through Fortune 500 companies. So that's how I started my career. That's how I learned about business on the job, basically. And then at an investment bank, I joined afterwards. This was around global financial crisis. Everyone was talking about stock markets. This is when your barber and your taxi driver were all giving you stock advices to buy NVIDIA and so on. I thought, I don't understand this as much. The best place for me to learn back then seemed like an investment bank where I get to work with many different PMs, many different CIOs, and I did that for seven years. That's what brought me to Hong Kong as well shortly after the global financial crisis. Then when the opportunity arose with RBC, really just trying to further grow and augment the Asian equity business, joining Mayur, who I've been working with for over 10 plus years. That's what brought me to this firm.

Yeah, a regular guest, Mayur Nallamala. And that's a great environment to work in with Mayur and in Hong Kong. It must be pretty exciting to go into work every day.

Yes, indeed.

Which then gets you a chance to come to Canada in winter at minus 20 here in Toronto. It's normally not like this in Toronto, David. We're having a real winter for the first time in a long time. But what we're seeing a spring in anyways, or maybe even a summer, is Japanese equities. We've had a lot of people on. And just so everyone knows, your expertise runs well beyond Japan because you're researching all of Asia.

Yes, all of Asia Pacific.

But we've liked Japan for quite some time, you and your colleagues, and we've really had it as a gap. And again, because of the experience in Japan, really since the early 1990s, a lot of Canadians don't think of Japan that much as a place to invest. I mean, if you were, as I was, a teenager through the late '70s and then into my early '20s in the late 1980s, Japan held a spot in investors' minds almost similar to the way we think of China from an economic perspective. Back then, Japan was really racing ahead of everyone. It was the number two economy in the world. And there were many worries, particularly south of the border, that it would become the largest economy, that it would overshoot the US at some point. And then, of course, that didn't happen. And Japan languished for a long time. But it's been very, very attractive, certainly over the last 18 months to two years. So David, where do we sit in Japan and what should Canadians be thinking about when they invest in Japan today?

Yeah. I think there's an interesting angle there for sure when we're looking at Japan equities, looking at opportunities, especially, right now when people are thinking about how much US equity exposure they have. Maybe they need to diversify, but they don't want to necessarily go into emerging markets as much. This is a strong developed market alternative that will give you stability and a lot of fundamental tailwinds, which we'll get into. Like you said, I think Japan equity has been forgotten for a long time. We've all heard of the term «lost decade». Well, it's actually three decades. So three decades, they were having this deflation. I think for the last three decades, the US average wage went up by three times while Japan was flat for three decades. And that's the degree of how Japan was asleep, if you will, as an economy, just in terms of the macro environment. And what's interesting is they've tried everything to get out of this deflation. It wouldn't work until we had the pandemic. And with the pandemic, the whole world was struggling to keep up with all this inflationary pressure. Living costs were up and it was really hard living cost-wise and everything, everywhere. But what's happened really interestingly during that time was Japan was actually pushed out of its bunker just because of that exogenous shock. And since then, with the help of a weak Yen, they've been maintaining this positive 1-2% inflation rate, and they're really trying to make this the new norm. So the economy is waking up. There's some interesting stuff, particularly from the top down, the regulators, and also the bottom up, the corporates, to really have this concerted thrust into getting Japan Inc back on track. And the interesting thing we also need to remember is that Japan has always been very advanced in terms of its industrial R&D tech power. And that's really hitting and dovetailing well with the global themes we're seeing in AI, semiconductors, data centers, and power and everything. A lot of this CapEx spend that's leading to earnings growth in US markets, it's actually benefiting the Japanese companies and their exports as well. So there's a lot of reason to be excited and happy to get into some of those points.

Sure. Now, one of the factors that's been interesting particularly for Canadian investors, but for global investors looking at Japan, has been that weaker Yen. Can you talk to just how far the Yen has fallen and then what are your thoughts? And I know this is outside of the equity space, but I'm sure that what's happening with currency has an impact on your decision making on equities in Japan. So what's happening with the Yen right now? How far has it fallen and where do we go from here?

Right. So as an equity investor, for our clients and all, I think there's two messages that I want to share. One is that if you haven't booked a ski trip to Hokkaido yet, please book it now because this Yen is not going to stay this cheap forever. The whole country is on bargain sale, and you would see that in your macro tourism numbers. So a lot of people worry about Japan having not enough people for weak consumption and so on. What they're doing strategically here is they're importing those consumers. Happy consumers from overseas are enjoying Japan skiing, food, and so on, and so forth. And that's been a big trend even before the pandemic. And there was a brief hiatus with the pandemic, of course. And then it's back in full swing. So that's one bit.

By the way, David, if you're not a regular listener, please subscribe to us wherever you listen to your podcast. We're also on YouTube so you can see the fabulous ensemble that David has worn to the podcast this morning. Subscribe. We love getting nice reviews. But David, I mentioned that because I've been talking about Japan as a tourist destination for years on this podcast. And you are seeing, just to point of fact, I know more people who have gone to Japan over the last two years than I could have ever imagined. So this is a real thing that you're talking about. Yes, the skiing is phenomenal. The food is even better. I'm a big coffee person, which we also talk about on the podcast. Some of the best coffee in the world. So sorry, I interrupted your thought. So the tourism and that, and then where else do we go with this?

It's not an interruption at all. Dave, really, what else is more tangible than this? This is the magnitude of Yen depreciation that we've seen. For people in Europe and Canada, this is a long haul flight, but people are going out of their way to travel because it's that cheap. Now, think of what that would do to the corporates when they're trying to book exports elsewhere. They're having price competition dynamics working in their favor like they've never seen before. Like I said, this is a bit of a strategic move from the government to boost growth through the exporters and also through tourism and also through having that inflationary, positive territory hum along. And they're trying to stabilize that. So while we think there would be two rate hikes from Bank of Japan this year, they're in no rush to get this weak Yen back up. It won't weaken much further from here. I think if we were two years ago, we might have worried a little bit more in terms of, oh, what if we have equity performance on a Yen basis, but on a non-Yen basis, what if it becomes a headwind? Well, where Yen is now, this is much more likely to be a tailwind to your equity returns in addition to what the corporates are doing from coming from the currency side.

And that's critically important. We often remind Canadian investors, first of all, you need to invest outside of Canada. Canada is a very small economy, and you are really limiting yourself in terms of the opportunities to invest if you're just staying in Canada. But then when you do go outside of Canada, you do need to think about currency. It's a factor in the decision making. And so, just for example, you invest in Japan, you convert your Canadian dollars to Yen. If the Yen depreciates, when you bring the money back to Canada, you buy Canadian dollars, Canadian dollars appreciate, you buy fewer Canadian dollars, it erodes your return. So something just to keep in mind. And that's why it's so important to reference that as an investment factor, because it certainly affects the return of your portfolio from a Canadian investor standpoint.

I think so. So the Yen part, just to recap, was that it's very weak, so book your ski trip. But then the other thing is this is really helping the overall economy, the thesis as well. It's more likely to be a tailwind from here for the foreseeable 12 to 18 months, at least.

Excellent. So then again, that helps exporters.

Yes, of course.

But what else is going on inside of the Japanese economy? You mentioned technology and how advanced it is. If you do travel to Japan, you'll notice how advanced it is from a technology standpoint. How does this all work in terms of what other areas of the market are doing particularly well in Japan?

Right. That's a good point. I think what's going on is there's a lot of reshuffling in the global supply chain. Obviously, with tariffs and also the Trump-led changes to world order, I think it's really reshuffling a lot of the supply chains. What's important to note is how we as a team, sitting in Hong Kong, the Asian equity team, approach Japan equities. Your average Japan equity manager would be a group of people likely sitting in Tokyo, maybe reading the same newspaper, maybe they are all Japanese men. There's a bit of a lack of diversity of thought in that setup, if you will, just generalizing. But then the way we tried to build our approach, already more than 10 years ago when we were looking at Japan equities, before it became really cool and sexy like it is now, is to really approach it from a fundamental industry expertise point of view. That's really helping us now because when the Japanese companies are exporting stuff, let's say, to a Taiwanese semiconductor company or a Korean semiconductor company, our team could fly over to Korea and Taiwan to meet the company who's buying these things to also get a sense of how much future CapEx or investments they're willing to make. Our Japan PM recently flew over to Korea and Taiwan to do such trips. We also have in mind what's happening in China, which is obviously a very heavyweight big player within the region. So understanding Japan, but also the regional supply chain, I think is a very exciting part of how we look at Japan.

Yeah. And this is such an important thing for Canadians when you're investing outside Canada. But, let's not be crazy here. I can't just go and knock on the door of a large Canadian company and walk in and sit down with board members and the CEO of the company and have a discussion about how their business is going, inspect the facilities, those kinds of things. It's not like we can do that in Canada. That's something that someone who manages a significant portfolio in the Canadian market, as RBC Global Asset Management has, would be able to do. But it does make a difference. And certainly, if you're going to invest outside of Canada, where it's just farther away in heart and mind, being able to invest with someone who can do those types of things is really important because you get so much out of that information.

I can't agree more. Let me give you some fun stats to think about. So if you look at, let's say, the S&P 500. You look at how many of the stocks in the S&P 500 actually have less than 10 analysts, under covered, under researched, less than 10 analysts covering these stocks, you'll find like 2%. That's the latest number I have. So only 2% of S&P 500 have less than 10 analysts covering these stocks. That same number for Japan, if you look at Topix 500, is more than half. More than half of the Japan universe is so under-researched. It's understandable because like we were saying earlier, there was three decades of the «lost decade». There was less focus on equities. So people who are doing the fundamental work on the ground, having both local insights and Asia-level insights, I think there's a real edge to investing long term here.

Yeah. So David, let's look at the market. Is this a case where it's a rising tide lifting all boats? Are there particular areas of the market, different sectors or maybe even by capitalization, is this a case where the big companies are winning or smaller companies coming on? When you look at your portfolio, where are you tilting and where are you having the most success right now?

Sure. That's a good question. So if you go back the last five years, let's start from 2021. And then for the last five years, every single year, you had healthy earnings growth as Japan as a whole. Corporate Japan as a whole has recorded good earnings growth last five years, year after year, after year. Stock performance as well, four out of five years also had strong price performance. And what's happening there is in addition to the earnings growth, what you're seeing is what they call corporate governance reform, where the companies are paying dividends, the companies are doing buybacks. So that's on top of your EPS growth that's driving up share prices. So that's the aggregate picture, and that is quite solid in itself. Now, what I would also mention to fully answer your question is there are still winners and losers. You do not want to buy the basket when there's winners and losers. What's happening effectively here when inflation kicks in, when wages go up like we were talking about, is the companies are seeing a change in their cost structure. Some of the businesses that they thought they could just hum along and wing it, they can't anymore because wages and costs are changing. So what's happening is they are divesting some of these businesses. Industries are getting consolidated. And there's also big changes, disruption at the global level that's happening with AI and power grid investments, as we've mentioned as well, which Japan is also well tethered into. There are definitely winners and losers, and that's something that we bear in mind when we think about our selective exposure to Japan equities, for instance. I think one of the things that I hear a lot when I'm seeing European investors, when I'm marketing there, talking to institutional clients, they have these old backward-looking ways of looking at Japan. Some people might say, oh, smaller cap, value exposure, it worked well as a factor in the past. But in the recent years, when markets are growing collectively, like I mentioned earlier, from a top-down thrust, well, what you see is that the large caps, big sectors, are actually leading a lot of this growth as well. So what's worked in the past, or a basket approach, won't work. We need to really do the work on a bottom-up basis and pick the winners and losers and stay nimble towards global macro and how Japan is changing there. And that's what we do day in, day out.

Yeah. And it's such an important point, David. We've been talking about this in several different markets. That idea that for a while it's been okay to just buy the basket. Like I said, the rising tide lifts all boats. But after a few years of that performance and concentration within markets and moving into a market that is going to be characterized as, as you say, more winners and losers, you want somebody there with expertise making those choices for you, instead of just buying the basket. That's going to be more important, I think, in all markets. But it's interesting to hear that Japan is just exactly the same.

Yeah, very much so.

So David, maybe we'll finish with one last perhaps impetus for the market in Japan, which is the political situation there. They just had an election. Has that changed or solidified your view? What are your thoughts on what's happening there politically?

I think it's getting a lot more optimistic, a lot more constructive. This concerted effort, as I mentioned a few times now, from top-down government and also the corporate side, this concerted effort does rely a little bit in terms of political stability and support. So you could argue this is a development since Abe—Abenomics from 10 plus years ago—but it's also been adapted and evolved since then. What Takaichi now has after her landslide win over the weekend is that she now has the political consolidation, if you will, to be able to support the companies. There's a lot more certainty or visibility in terms of policy making that the corporate leaders can now lean in on, and they could just really focus on what they do very well, creating value in their own industries. And for us, we talk to CEOs and CFOs. Because the election was just last weekend, I haven't met any since, but I wouldn't be surprised if a lot of them are feeling a lot more upbeat, a lot more constructive, and comfortable to play their best game.

Yeah. So Japan is kind of like me. My career, some would describe as being three lost decades and the pandemic shook me out of it. And now I'm having a reemergence, David. It's quite nice. My wife's quite happy about it.

It's all coming back.

The kids as well. And the kids have always been fans of Japan. It’s really interesting. I go back and watch movies from the late 1980s. And again, the power of Japanese culture and business back then, I've never forgotten it. So I've always been waiting for this Japan resurgence, and sure enough, it's coming. And what's great is that you're doing a great job in terms of capturing that opportunity in the Japanese market.

Yeah. One point I'd add there just to see how big this is and how we're not late to it at all is if you think about Japan as a part of the global index, it's about 5 or 6%. Most global investors underweight this by roughly 100 to 150 basis points, the last survey I saw. International equities is another big product that we focus on together with our European equities team. 25% of that index also comes from Japan. There's a lot going on here. But then because it's underweight, what will happen is in addition to the currency that I mentioned earlier, flows will likely be a tailwind to this equation as well. If you look at Japanese households, more than 50%, because they're coming out of a deflationary environment, they're still holding cash in deposits. And the government is nudging the household. Look more into things like equities so that they're inflation protected. This is all tailwind to come. And this is something that's quite interesting to watch and see from here.

Yeah, that is such a great point because when you have the potential for significantly more flows into that opportunity, that's a driver as well. The old rules of supply and demand are always in play, even in stock markets. I think sometimes people forget that. Just before you go, David, you mentioned South Korea, which I just think is a fascinating economy, fascinating market. I spent 14 hours in Seoul one time on a layover, and it was one of the best 14 hours of my life. Just fantastic. And mainly because of eating. I like to eat. And the coffee was good, too. But when people think about South Korea as an investment market, we see examples of the South Korean economy all over Canada. You just go and get stuck in a traffic jam. But it's much bigger than Hyundai or Kia. It's a tremendous investment market as well, is it not?

Yes. So what's happening, and this is a very similar picture to Japan as well, which is why it's worth seeing this in parallel, is number one, I think as US is trying to bring back a lot more manufacturing, as they're trying to put more CapEx into defense and also power grid investments and all, they are leaning towards industrial powers within Asia, like Korea and Japan, to supply that and also make foreign direct investments into the US. So that's a big part of what we've been seeing over the last 12 to 18 months. So you're talking about shipbuilding companies in Korea. You're talking about power equipment, in addition to the semiconductors that are feeding into the AI industry and data centers. And this is a big part of why Korea was the best performing market in the last 12 months. But the same themes are also hitting Japan as well. And this is overall becoming very exciting.

Yeah. When the prospect for global growth is higher, South Korea is one of those markets. It's almost a barometer for where the world is going from a growth perspective because as you say, you've got that intensity in manufacturing, large scale building, you've got technology, you've got all those spaces. So it moves. And again, it's just another indicator of where global growth is going. And it doesn't look like that's going to stop anytime soon, does it?

No. And then in addition to that, the new President that stepped in, he's trying to borrow Japan's playbook and think about why Korea is suffering from this big discount in its corporate earnings and value creation. And he's trying to resuscitate that side as well. And it seems to be working. They just celebrated passing 5,000 on the Kospi. Sell-side is getting excited and upgrading their numbers and saying 7,000 is the next milestone. So for now, momentum very much seems to be in favor on the fundamentals, but also on the share price side of things as well.

And just what this conversation reminds investors of, David, is when something is completely down and out in the eyes of everyone else, it's probably when you should be taking a look at it. And I think Japan is a classic case of that. Like you say, it was just a forgotten place pre-COVID. And then you just need a little shake, something to happen that shifts the dynamic. And then all of a sudden it takes off. And if you're looking for those opportunities, as I know you are all the time, but for an everyday investor, those opportunities are there if you look around. So at the deepest depth of despair, that's often the time, just like at the height of optimism, you got to be careful there, too.

I think I heard this in one of your podcasts, Dave, where this is why we don't try to time the market. You try to go across, stay diversified, find good ideas in respective pockets. Yeah, I think I heard that from one of your podcasts, actually.

That must have been a smart guest because I lean on the guests as I did today. David Soh, that was fantastic. Thanks for coming on. And we'll have to get you on again soon.

That'd be great. Thanks a lot.