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Is it finally Japan’s year?

Hannah Stodell asks if Japan will be a surprise hit

The Japanese equity market lagged significantly in 2009, with the IMA Japan sector accounting for 14 of the bottom 20 funds, according to figures from Morningstar, yet some are tipping it for success this year.

On first glance, IMA sector performance figures for Japan do not make for pretty reading. Over the last year, it returned 7.1 per cent against 27.7 per cent for UK all-companies, 31.5 per cent for Europe and 17.1 per cent for the US. But could Japan prove to be one of the investment surprises of 2010?

Schroders Tokyo fund manager Andrew Rose says there are a number of arguments which back this idea.

He says: “One big problem last year was the strength of Japan’s currency. One can make a case that the yen should weaken from here against the dollar so that should provide some relief. There was also a lot of equity issuance, particularly by the financial sector, which is still happening but widely expected now and therefore probably already reflected in the prices so those two negatives look to be exhausting themselves.”

GLG Core Alpha lead manager Stephen Harker says although Japan is perceived as a bit of an oddball, in common currency terms, it has been one of the better- performing equitiy sectors. He says: “Japan has delivered a developed world return since 1998 but everybody forgets that. As an equity market, it is unbelievably cheap. Everybody hates it, loads of people have got zero exposure and everybody loves Bric so I would be inclined to think that it was likely to win rather than lose.”

Neptune’s Japan opportunities fund managed by Chris Taylor was the top performer of 2008, according to Lipper. The fund grew by 84.26 per cent in sterling terms but by only 7.99 per cent in yen.

Hargreaves Lansdown senior analyst Meera Patel says: “The fund outperformed partly due to the currency but the manager also put a short on the Japanese index which helped in a falling market.”

Given the currency/ market dichotomy, F&C fund of funds manager Paul Verne says buying Japanese growth and shorting the yen may be a good speculative trade for 2010.

But he says: “We are not that aggressive so we hold a bit of Japan as a general diversifier at 5-6 per cent. Will Japan be a prevalent theme over emerging market growth? Probably not. I think that the US will perform better.”

Skerritt Consultants head of investments Andy Merricks says strengthened exports and growing trade links between Japan and Asia from the weakening yen could trigger a turn-round for the region.

He says: “We have seen Japan spike and make 100 per cent two or three times in the past 20 years, only to give it back but when experienced managers such as JO Hambro Capital Management’s Scott McGlashan go bullish for the first time in a decade, as he did in 2009, we start to take notice.”

But Alan Steel Asset Management consultant Alan Adam remains cautious.

He says: “We still think that the country is in a mess and the demographics are pretty negative. They are very much an export-driven economy and that should help but the majority of people are in the 55-60- year bracket and just do not spend the same.

“Unlike Japan, which promises a lot and produces very little, the US has proved to be one of the most resilient work-forces and economies going so that is our surprise call for the future.”

But Harker argues that Japan has known about the demographic problem for 30 years and has made the necessary prepar- ations. He says: “People have been warbling on about demographics for years and I think that is in the price now.”

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