Weighing up Japan
Joanne Ellul reports that fund firms are optimistic on Japan prospects and feel equities could rise sharply
Fund managers remain relatively positive about Japan despite the country’s slip back into recession since the March earthquake and tsunami.
In the first quarter, gross domestic product contracted by 0.9 per cent, marking a 3.7 per cent annualised drop, according to the latest figures from the Japanese Cabinet Office.
Last week, the BlackRock global funds Japan value fund was the only Japanese equity fund downgraded by Standard and Poor’s Japanese sector review.
Of the 28 funds surveyed, none was upgraded. S&P downgraded the Black Rock fund because it was taking on more responsibilities for other Pacific mandates and did not pick stocks successfully enough.
PSigma’s chief investment officer Tom Becket has maintained his position in Japan with a view to increasing to a more overweight position.
He says: “The prospects of Japanese companies are underestimated and I think people are missing an opportunity in Japan. The potential for acceleration in earnings power and margins in global exporters will improve with a weakening yen, which we expect to happen over the next two years. If we can see a return to how the economy was before the earthquake, then the Japanese market could easily go up by 40 per cent over the next year.
“In our funds of funds, 7.2 per cent of a 50 per cent equity weighting is in Japan. At some point, the opportunity will be to go much longer in Japan. I could easily estimate our equity weighting in the fund of funds to be 20 per cent of equity exposure in Japan and so a 10 per cent absolute weighting. That exposure will be almost exclusively through exporting businesses.”
Now that Japan has returned to recession, many managers assume that the yen will weaken. Becket says: “I will hedge out any yen risk by buying funds that have yenhedged share classes.
“I have looked at buying a long-US dollar, short-yen ETF. At some point, this will be a suitable trade.
“The way forward is for the Bank of Japan to weaken the yen, perhaps through quantitative easing. Then we will start to see really strong performance of Japanese equities.”
F&C multi-manager Rob Burdett says: “We were overweight Japan relative to our peers until about a month ago and we have been trimming back to a neutral position across the multi-manager range.
“We have partial weighting of 50 per cent towards the hedged share class in the Jupiter Japan income fund, which we have been adding to over the past six months. It is the first time we have been hedged in the multi-manager funds.
“Experts have been wrong about the yen and people can have a habit of flocking to historically harder currencies in bad times, which is why we have not gone fully hedged against the yen.”
Burdett insists that Japanese companies are performing well. He says: “What is stopping us from going underweight Japan are the valuations of companies in the market and the fact that foreign buyers have been buying Japanese equities. We are more likely to go overweight.
“It is quite hard to gauge the impact of the earthquake on nuclear production so we are staying neutral until we have seen how the full impact plays out.”
F&C head of Japanese equities Stefan Bain says: “There will be a horrible GDP run for the next couple of quarters which is going to hit earnings this year but despite the economic environment, Japanese companies have been able to grow EPS and aggregate.
“We do not expect the Japanese economy to fall much more because it is trading at around book value and there is a lot of cash on the balance sheets of companies. Should the economy turn down, other markets are more susceptible to a sell-off. As Japanese equities are cheap, it should give some protection should the economy start to roll over.”
Cazenove head of multi-manager Marcus Brookes has trimmed his exposure to Japan in the £132m Cazenove global (ex cluding UK) fund by 1 per cent since October and hedged 40 per cent of the fund into dollars to protect against falls in the yen.
He says: “GDP is going down and the debt pile is going up, however, private debt is very low. There is a shrinking population and you need lots of people paying tax.”
Yellowtail Financial Planning managing director Dennis Hall says managers are brave for investing in Japan.
He says: “Nothing has happened over the last 20 years that makes you think that Japan is going to be a powerhouse. A lot of government stimulus is going into the rebuilding effort. If those managers that think that smaller companies in the construction area, for instance, are profitable are stockpickers, they can make money out of that. But I do not think a lot of investors have faith in Japan.”
Hall says it is telling that local Japanese managers are not looking to reinvest their money in Japan, as they have seen a lot of false dawns.
He adds: “A lot of Japanese equity players are world-stage and they are making the cars that are not going to be bought. There will be a global economic slowdown and with high interest rates and high inflation in the economy, you might see people not buying the products Japan exports.”