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Adviser Fund Index – Japanese equities hit by negative sentiment

Japanese equities remain out of favour with the Adviser Fund Index panellists, according to the latest AFI survey.

As reported in last week’s AFI column, four of the 10 respondents to the survey said they expect Japan to underperform the other major equity markets over the next 12 months.

No other region received so many pessimistic votes in the survey.

Two panellists also forecast low relative returns over a three-year timeframe.

A stream of poor economic data in April did little to tempt foreign investors back into the Japanese market. First, the Bank of Japan’s quarterly Tankan survey on business conditions highlighted widespread negative sentiment. The headline measure of confidence for big manufacturers fell from 19 last December to 11 in March – a 17-quarter low. This figure was below previous expectations and is projected to decline to seven in June.

According to separate data published by Japan’s Cabinet Office, consumer confidence also remains at depressed levels and marginally above a five-year low. Concerns centre on rising energy and food prices, with average expectations for inflation running at about 3 per cent over the next year.

The Bank of Japan’s core measure of consumer price inflation, which excludes fresh foods, rose to 1.2 per cent in March, which is its highest rate for 10 years.

John Millar, who manages Martin Currie’s Japan fund, says he doubts that inflation will hit the levels forecast by consumers but believes that the Bank of Japan’s next interest rate move is likely to be upwards. Rates were left on hold at 0.5 per cent last week but Millar says there is an 80 per cent probability of a hike by the end of 2008.

The Capital Economics consultancy is predicting a quarter-point increase for later in the year, with interest rates set to hit 2 per cent by early 2010.

Millar says rising rates are a sign of better times to come after a 12-year period of deflation. Japanese investors, who have previously focused on bonds, may start to turn their attention to equities.

He says: “I welcome the normalisation of interest rates. It is the only way to start addressing chronic risk aversion in the Japanese markets and domestic investors are a huge potential source of demand for equities.”

Martin Currie Japan is one of eight Japan funds in the Adviser Fund Indices. The other funds are Baillie Gifford Japanese, JP Morgan Japan, Jupiter Japan income, Legg Mason Japan equity, M&G Japan smaller companies, Odey Japan and SG Japan core alpha.

Performance from the funds has varied widely, according to data from Financial Express. Returns over the 12 months ending April 30 ranged from a fall of 34 per cent for the Legg Mason portfolio to a gain of 3 per cent for SG Japan core alpha.


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