IMA Japan: Sector has lots to offer

Having had a deflationary environment for numerous years and high debt to GDP, the economic outlook may be depressing. Some managers, however, have been adamant that at some point Japan will turn around and make money for investors.

The earthquake and tsunami in March 2011 could have been seen as the final nail in the coffin, but the reconstruction efforts seems to have provided a boost to the economy, with the Nikkei 225 returning 0.09 per cent in the one year to November 1, compared with a loss of 1.26 per cent from the MSCI World.

In addition the IMA Japan sector was one of only five out of 33 sectors that posted a positive return for the one month to September 30, and also produced the joint highest return of 2.9 per cent along with the IMA UK Index Linked Gilts sector.

The sector has also performed well for the year to September 30 with the IMA figures showing a positive return of 5.5 per cent, the fourth highest across all the IMA sectors.

This is supported by increased retail inflows into the sector, including £11.78m in September, although this is a significant drop from the £110.1m in August. Nevertheless the sector’s assets under management have increased by £1.28bn year-on-year to September 30, to reach £7.88bn.

This equates to approximately 1.3 per cent of total UK IMA assets.

However, in October the picture seems to have deteriorated slightly, with the Nikkei 225 down 2.3 per cent, and the MSCI Japan index down 4.15 per cent for the month, compared with a positive return of 4.04 per cent from the MSCI World. This could partly be attributed to the continued turmoil in Europe having an effect elsewhere, but also the consequences of Japan officially slipping back into recession having recorded three successive quarters of negative real GDP.

Figures show the Japanese economy contracted by 0.6 per cent in the final quarter of 2010, by 0.9 per cent in the first three months of 2011 and by a further 0.5 per cent in Q2 2011.

John Greenwood, chief economist at Invesco, says: “In spite of encouraging progress with post-earthquake and post-tsunami reconstruction spending, housing investment fell in the second quarter, as did non-residential investment spending which declined 9 per cent quarter-on-quarter.

Exports also declined, still affected by the damage to supply chains and by softening economic activity abroad.

“Therefore exports are still roughly 6 per cent below their pre-earthquake levels in February, and 24 per cent below their pre-recession highs in July 2008. The continuing strength of the yen has been another factor holding back export performance as the Japanese currency has appreciated from 85 yen per US dollar in April to 76 at the end of September, a rise of approximately 10 per cent.” However, figures from the OECD suggest Japan’s economy will improve, forecasting GDP growth in 2012 of 2.25 per cent. Therefore while investors remain locked onto ‘safe havens’ including an influx into the Japanese yen, it could be that Japan has more to offer, if it can continue to perform well and offset concerns about its economy with good opportunities in its equity market.

Nyree Stewart is deputy features editor at Investment Adviser

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