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Don’t trip the trap in Japan

Joanne Ellul reports on hopes and concerns over a possible revival for the Japanese equity market

Fund managers are divided on whether Japan presents a real investment opportunity or is a value trap.

In April, the Bank of Japan increased the scale of its key asset-purchasing programme by a net yen 5trn to yen 70trn, which could be a signal to investors that the end of the deflationary market may be on the horizon.

In February, the Bank of Japan also showed its commitment by setting an inflation target of 1 per cent. The consumer price index inflation rate in Japan was 0.5 per cent in April, down from 0.7 per cent in March.

Rathbone Unit Trust Management head of multi-asset investments David Coombs, who has just visited Japan, says it does not look likely that the 1 per cent inflation target will be hit.

He says: “There is palpable scepticism about the central bank’s commitment to this target. It is obvious the minute you arrive in Japan that the yen is overvalued – Japan is frighteningly expensive and this is hurting exporters.”

Coombs warns investors should not be seduced by low valuations in Japan, where there are 10 times price-to-earnings ratios.

He says: “The Japanese equity market – the Topix – is a value trap but there are select companies that are worth investing in. Investors just have to search far and wide for them, possibly in niche areas of the market.”

Jupiter Asset Management joint head of Far Eastern equities Simon Somerville says he expects inflation to return to Japan. He says: “Investors question whether Japan is a value trap. I can understand that argument as companies have had to cut their costs to compete in a deflationary environment, which Japan has been in for the last 10 years. But I expect Japan will see inflation return and if that happens, there will be upward movement in the Japanese equity market in terms of valuations.”

Aberdeen Asset Management multi-manager fund manager Scott Spencer sees value in Japan.

He says: “We hold the £1.1bn GLG Japan fund in the £102m Aberdeen equity managed fund. Last year was the first year the GLG Japan fund underperformed. It had very good performance at the beginning of the year but lost some of that in April and May. We have been buying more into the fund to keep our target 6 per cent weighting as the position drops due to a depression in the market.”

Spencer says the strong yen does not necessarily mean exporters should be avoided.

He says: “In the last 12 months, we had a domestic bias but now we have a slight export bias. The value in exporters has been growing, as more investors have been buying domestics as a result of the strengthening yen.”

Dennehy Weller managing director Brian Dennehy says: “When we see global markets go sharply lower, as we move towards some sort of solution to the problems in Europe, brave investors should have Japan on their list as the market could sharply rebound on the back of positive news.”

Hargreaves Lansdown investment analyst Richard Troue says he expects the earthquake and tsunami that hit Japan in 2011 will eventually boost economic growth as the rebuild gathers pace.

He says: “The 2011 earthquake and tsunami were devastating for Japan and we are going to see positive effects in companies involved in the rebuild, like infrastructure companies, in terms of a re-rating.”


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