Baillie Gifford blames ‘low’ valuations for Topix lag
Baillie Gifford’s Japan trust lagged its Topix benchmark over six months to end February, as large caps outperformed its favoured small and mid-cap names.
Over the period, the fund produced net asset value growth of 3 per cent against 5.7 per cent from the index.
However, manager Sarah Whitley remains positive, highlighting “anomalously low” valuations for Japanese equities. The trust’s board has continued to maintain borrowings that give it additional exposure to the market – worth 17 per cent of the trust’s net value.
“Japanese company profits are likely to make good progress from here, supported by demand growth, cumulative cost cutting and a weaker yen,” she said.
“The Bank of Japan has adopted an inflation target and Japan has begun discussions to join the Trans-Pacific Partnership, a significant Pacific-based free trade area, as well as aiming for negotiations on a Japan-EU economic partnership agreement.”
Looking at recent market conditions, Ms Whitley said many Japanese manufacturers suffered further major disruption – after the earlier earthquake and nuclear disasters – when floods damaged a significant part of their production base in Thailand.
This clearly hampered their recovery and led to further profit downgrades for the 12 months ending March 2012. However, Baillie Gifford expects profits will finally recover, with the rebound enhanced by weakness in the yen, which makes Japanese goods cheaper and hence more attractive to international buyers.
“The economy is also expected to recover and grow around 2 per cent in 2012 as the reconstruction of Tohoku [region of 2011’s earthquake and tsunami] starts in earnest,” added Ms Whitley.
“With the recovery in the US and continued growth in the rest of Asia, there are some signs the deflation that Japan has suffered may be drawing to a close.”
Like many peers, she also highlighted the Bank of Japan’s recent monetary stimulus and inflation-targeting regime.