A cooler future

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February 4, 2020

The Walter Scott investment team explains how a holding in an environmentally-aware Japanese air-conditioning manufacturer fits the group’s wider investment thesis and how the winds of change are blowing through this niche industrial segment.

Ever since the Lost Decade,1 or the 10-year period of economic stagnation Japan underwent following its asset bubble collapse at the end of 1991, the nation struggled to get back to the level of growth it experienced prior to the setback. Despite this, there are still innovative, market leading Japanese companies, according to Walter Scott’s International Stock team.

“For all the commentary regarding the economic sluggishness of Japan, and the relative inability of Abenomics to propel the country into a higher growth trajectory on a sustainable basis, we believe it remains a repository of world-class companies,” the International Stock team said in its latest quarterly commentary.

An area where the team has been able to find attractive Japanese companies is in Industrials. A consequence of its bottom-up, benchmark-agnostic approach, Industrials has been the largest sector position in the BNY Mellon International Stock fund since the end of 2018. Currently the fund has a 19.79% position compared to its benchmark, the MSCI EAFE Index, which had a 15.01% position, as of December 2019.

Highlighting one of the holdings in this sector, the team outlines the stock specific attraction behind a Japanese air-conditioning manufacturer. According to the team, the Japanese aircon firm is implementing ESG characteristics into its business model, which has been paying off in its financial performance.

Air conditioners have long been notorious for their environmental impact, due to the historical energy inefficiency of cooling air and using greenhouse gas refrigerants. The Japanese aircon firm has considered this and as a result is focusing its products on energy efficiency and to incorporate environmental technology, according to Walter Scott analysts.

In fact, this is all part of the company’s plan to generate zero carbon emissions by 2050—a recurring theme in much of the developed world.2 On top of a greater emphasis on ESG-related issues, the Japanese company has also, in Walter Scott’s view, benefited from a global transition, which has seen the effects of urbanization drive a greater need for the product it sells.

“Growing populations, urbanization, industrialization, rising living standards, and the shift towards air conditioners being regarded as an aspirational yet a near-necessity product in many locations, remain powerful drivers of the air conditioning industry,” the team said. “It’s clear from our conversation with the company that they’re excited about what digitalization can do for usage and energy consumption.”

In regards to the long-term growth trajectory for air conditioners, the total number of megacities across the world, or cities with a population of over 10 million inhabitants will increase to 43 by 2030, according to United Nations projections.3 This further reinforces the rapid rate of urbanization taking place, which should likely lead to further demand for air conditioning.

1 The Balance: What you can learn from Japan’s Lost Decade, September 18, 2019

2 SDG knowledge Hub: One-sixth of global economy under net zero CO2 emissions target, July 23, 2019

3 United Nations Department of Economic and Social Affairs: 68% of the world population projected to live in urban areas by 2050, May 16, 2018.


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