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Harker’s hunch

I have to cast my mind back to 1987 to recall a sustained period of stockmarket volatility similar to that seen in recent weeks. Rises and falls of 1, 2 or 3 per cent a day seem a matter of course, with a few bigger ones of around 5 per cent thrown in. It is hardly a helpful environment for long-term investors already frightened of committing funds to the markets. A possible solution is to dripfeed money into areas you think offer value on the poorer days, although even this can be tricky psychologically.

One region that has virtually become a no-go area for private investors is Japan. This is perfectly understandable. Since the heydays of the 1980s, Japan’s stockmarket has been an exceptionally poor performer, although the considerable strength of the yen, up by more than 80 per cent in the past 20 years against sterling, has mitigated the losses experienced by overseas investors. There have been so many false dawns for Japan over the years that investors are rightly sceptical but a recent meeting with Stephen Harker of the GLG Japan CoreAlpha fund highlighted to me that Japan is now very, very cheap.

Mr Harker believes the market is already incredibly oversold. He says the Japanese stockmarket has been the worst performing in the developed world in every downturn since 1988, with the exception of the most recent one. Despite the global credit crisis rumbling on and the challenges created by the tragic tsunami in March, the Topix index is down by only 9 per cent since the start of the year in yen terms. Perhaps this resilience means it really has reached rock bottom.

Stephen Harker has had a poor year to date in terms of performance. The real action has been in smaller company stocks with exposure to the Bric economies but he believes this cycle is now coming to an end and that conditions are set to be more favourable for his fund, which invests in the biggest Japanese stocks.

Always a great contrarian, Mr Harker disagrees with the consensus view th‘at Japan should benefit from its proximity to China. He is bearish on China anyway but feels it is “eating Japan’s lunch”, gradually taking market share from the country’s manufacturing sector. He says an economic downturn in China will actually benefit Japan as it will mean lower commodity (especially copper) prices, which should boost Japanese company profitability.

Looking at Japanese stocks, financials are particularly cheap. Having been through a deleveraging process over many years, there is little sign of economic distress and Japanese banks have already been outperforming those in other global markets. Interestingly, retailers are also having a good run as consumer confidence seems to be growing.

This is not to say Mr Harker is bullish about the global economic outlook but he does believe Japan is poised to outperform. It went through its own credit crisis some years ago and most investors gave up on the market having had their fingers burnt, so valuations are exceptionally undemanding.

Japan’s public debt pile is often cited as a catastrophe waiting to happen but Mr Harker feels it can be overcome. The country effectively owes itself money, with the debt principally owned by domestic investors who may, says Mr Harker, have to take a haircut on it.

As usual, the yen is the wildcard for overseas investors in Japan. Stephen Harker’s view is that the yen may weaken slightly and that this will benefit Japanese companies whose exports would become more competitive. It is important to note, however, that many Japanese multinationals gave up on their domestic economy years ago and have operations all round the world. They are truly global businesses and not reliant on Japan itself.

It is unusual for Mr Harker to suffer underperformance for three quarters in a row and I note another fund manager, Paul Chesson of Invesco Perpetual, has had a similarly difficult time. If you are a contrarian investor, gradually allocating some money to Japan looks like an interesting bet right now – and this fund is a high-quality choice.

Mark Dampier is head of research at Hargreaves Lansdown

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