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Recessions and elections: Is now the time to invest in Japan?


The Japanese economy re-entered recession this week while voters in this weekend’s general election are being asked to decide between two different cures for the country’s economic woes.

Investors in the sector may have plenty of scars from disappointing performance in recent years but advisers and multi-managers suggest there are opportunities worth considering.

Japan was officially declared in recession after the economy contracted in the three months through to September and the GDP estimate for the second quarter was revised down by the Japanese government. The country has been in recession five times over the last 15 years.

The build up to the general election on Sunday has seen the main opposition and forerunner in the polls, the Liberal Democrat Party, attack the Bank of Japan for not doing more to stimulate the shrinking economy.

LDP leader Shinzo Abe plans to boost the economy through fiscal stimulus and “unlimited” monetary easing. Democratic Party leader and current prime minister Yoshihiko Noda warns their campaign puts central bank independence at risk.

Voters are being presented with two very different economic proposals. Cazenove Capital Management head of multi manager funds Marcus Brookes sees a potential benefit for exporting if, as expected, the LDP are elected.

He says: “Japanese policy is likely to change if Mr. Abe and the LDP come back into power and the Bank of Japan governor Masaaki Shirakawa retires. Both these moves are likely to see an active approach to devaluing the Yen, which has been far too strong for the Japanese export sector.”

IMA data shows the Japan sector had outflows totalling £129m over the last six months, compared to total inflows of £134m for the six previous months. FUM for October 2012 stood at £6.55bn compared with £7.29bn the previous year and £6.66bn for October 2010.

While a change in political and economic leadership could bring investment opportunities, Chelsea Financial Services managing director Darius McDermott highlights that investors in Japan have not had much to smile about over the past 20 years with recurring recessions, a banking crisis and deflationary issues.

He says: “There was a massive boom in Japan during the mid 1980s up until the early 1990s. Since then they’ve basically had a 20 year bear market across pretty much everything including equities.”

McDermott notes that Japan still does have strong investment attributes, principally its many multinational companies and export relationship with neighbouring China, for investors willing to brave the risk.

OPM chief investment officer Tony Yousefian says 2012 has been a tough year for his overweight position in Japan but he believes it is starting to pay dividends. He says: “We’ve been about 20 per cent overweight in Japan for 2012. Unfortunately this has cost us performance but there are signs that the Japan position in our Worldwide Opportunities fund is finally beginning to pay off.”

He blames poor global growth for the disappointing performance, given that Japan is so globally-oriented.

OPM World Wide Opportunities fund has an 11 per cent total exposure to Japan, compared to a benchmark position of 9 per cent. It has a 6.5 per cent position in M&G Japan, managed by Dean Cashman, and a 4.5 per cent position in Neptune Japan Opps, managed by Chris Taylor.

McDermott believes that in the short term the start of another recession could prove the best time to invest, although he has doubts about the longer term investment story. He says: “It is a high risk market and while it may not be the best place to invest long term, the equities are cheap on all historic measures. For this reason it’s our contrarian bet for 2013.”

Chelsea highlights the popular GLG Japan Core Alpha fund which reopened last week after soft-closing earlier in the year due to concerns about a lack of liquidity in the Japanese market. The fund was around £1.1bn when it soft-closed in March and is now around £855m. The fund has struggled in recent times, sitting fourth quartile in the IMA Japan sector over three years having fallen 0.6 per cent compared to an average return of 12.3 per cent.

However, McDermott says the fund’s focus on large and mid-cap value stocks should serve it well.

Others are holding back from investing in GLG fund for the time being. Yousefian says he thinks highly of the fund but has some concerns about its ability to react to economic events, given its size. He prefers “smaller, more dealable, funds”.

Brookes says Cazenove has a 6 per cent Japan position in its Multi Manager Diversity Fund, despite its cautious view of the Japanese economy.

He says: “It looks cheap relative to other markets (particularly in the US), but we are not bullish on the economy which still has some headwinds.” Cazenove has chosen to invest with the fund using the US Dollar hedged share class as a way of avoiding exposure to a weakening Yen.

Despite the economic and political uncertainty, Skerritt head of investment Andrew Merricks says investors could be missing out by avoiding Japan exposure. “It cannot get any worse than it has been for the last twenty years, meaning it can only get better. That in turn means opportunities for investors.”

For him, investing in Japan should come as a lesson for the UK economy which is could move into a triple-dip recession next year. “We could well be turning Japanese,” he says.


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