A slightly dated but interesting conversation with James Shannon, the CEO of Indus Capital Partners. Some of my notes are below (not intended as a comprehensive transcript – these are for personal reference only and any mistakes are my own).
Firm history – founded in 2000 by by six former partners from the Asian equities team at Soros Fund Management. Their DNA is long/short equity investing and having boots on the ground. When he joined Soros in HK, that office was led by Sheldon Kasowitz and Rodney Jones. After a couple of years, their team also took over Tokyo. Soros had always invested in Japan but it was a different team previously. So when they launched Indus, they launched with Japan long/short and pan-Asia long/short. As the years went on, there were a lot of twists and turns with Indus, but if he fast forwards to today, they are solely focused on Asian equity markets, both long/short and long only. Most of their team has also been in place for a long time.
Team – they have already gone through their first round of succession planning. David Kowitz ran the Asia Pacific fund, Sheldon Kasowitz ran the Japan fund and over the course of 15-16 years, they ran the funds and the firm as co-managing partners. Over time, David first stepped away from managing money and then from managing the firm, then Sheldon did the same at the end of 2019. All the 3 fund managers now were handpicked by the founders as analysts on their team, got promoted from within and now run all the money while the partners own the majority of the firm.
Thoughts on Japan – seeing more investor interest in Japan in the last year and a half than they have had in a decade, maybe longer. Everyone wants to figure it out. It is still one of the largest economies in the world, one of the biggest weightings in the global benchmark. No one wants to miss it.
One theme he is digging in on are the parallels for Japan and China today. For example, are we seeing the things in China that we saw in Japan when that bubble burst? Below the surface, there are signs that things are a lot worse, despite the lip service from Beijing. The CSI 300 Index had its peak in Feb 2021, since then nothing but lower lows with many false starts. Many allocators are still overinvested in China, and many are trapped in privates. Similarly, in Japan, they are asking what are the things they have seen in the US – from 1974 to the early 1980s, the Dow was flat, what was it that turned it around? Specifically, what were the positive regulatory changes that helped unleash balance sheets and allowed the animal spirits to come back?
They are seeing some things in Japan they have never seen before. Companies are more willing to engage from a management perspective, they are being told by the TSE to do so. Also seeing capital being returned to investors via increased dividends and buybacks. And then, starting with the insurance industry, the FSA is saying no more cross-shareholdings. This has the potential to become a virtuous cycle. But let’s see what the companies do with the cash that they raise from unwinding those cross-shareholdings. He thinks there will be more focus on return on invested capital, and hopefully the excess cash will be returned to shareholders.
Japan macro – the economy has been in a deflationary and disinflation cycle for 34 years. In the West, we don’t know what that feels like. Japan needs inflation and we are starting to see it in wage inflation. Unfortunately, historically, that gives you an imported goods inflation, which is not healthy for the economy, that’s the spiral we don’t want to see. The virtuous cycle is wage inflation and services inflation, then people get their animal spirits. The government has also come up with a revamped NISA system that is, in simple terms, similar to the 401(k). Now people are investing more money in domestic equity funds than foreign equity funds.
On the Yen – this is clearly unchartered territory. But he will give them more credit than most market participants do. As a trader, you want to say that intervention never works. But he has lived through intervention working in HK in 1998, Thailand and Indonesia fell, but HK held. They survived but with a lot of battle scars. The US is such an important partner with Japan right now, more so than ever. He thinks strategically the Yen being stable is equally important to the US and Japan in financial markets and for broader stability in Asia.
In terms of the markets, the core 30 has beaten the overall Topix YTD (this was as of June). As a trader, he would be looking for rotation to tell us the rally has legs. Unfortunately, that is not how the world seems to works right now, so have to hold some amount of risk that it will stay relatively concentrated. The market has not caught up to rewarding the consumer names yet. 3-5 years out, thinks some of those consumer names are great opportunities.
Other markets/opportunities of interest to them in Asia?
Korea – potentially going through a similar transformation as Japan, you have some world class companies and many household names. But the market has been very retail driven and that has been a phenomenon that has hurt the Korean market. Their team attended a Korea Day recently, with the exchange and high levels of the finance office in government, as well as the banks and brokers (following up on the “Corporate Value-up Program” that was announced in February).
India – the measures that have been in place since Modi has been in office have really helped the market. The demographics in India also work. International investors have participated in size, but the domestic investors have taken the bait and invested in the market. The rally has broadened out. One thing that remains to be seen is does a divided government help the market, which historically it has. So many people have been burned over time trying to invest in India, picking the wrong partners etc. He thinks it is still a market where, over time, people will be rewarded for getting it right.
Vietnam – he visited for the first time 15-16 years ago, it is an interesting market in terms of the structure of how stocks actually become public companies and how they trade there, as well as the offshoring story from China. The market structure is still not efficient enough for many institutional investors but they have invested in a few names over the years.
Concerns – his Bloomberg header is the 2/10 spread. There is a FOMO market out there. Still too much money in the system, you can look at housing, stocks, the concentration of stocks etc. Every time we have something like the “regional bank crisis” last year and the Fed bails us out, the market just takes on more risk. We are stuck in that cycle right now. It will unravel at some point but when and how it all plays out he is not sure.
On the Taiwan risk – all market participants should be concerned but, on the other side, it is a risk he thinks we should be willing to take for a few reasons. One there is a growing counterbalance of power between Japan, South Korea and the US. Two, Taiwan is starting to offshore as well, they have built fabs in Japan, TMSC now building its third fab in the US.