Japan’s next phase is crucial

In the immediate aftermath of last year’s earthquake and tsunami, shares in Japan investment trusts lost up to 16 per cent.

One of the biggest fallers was the £65m Baillie Gifford Shin Nippon trust, which had almost a third of the portfolio exposed to consumer goods companies. It saw its shares fall 16.5 per cent in the week following the disaster.

More than a year on, however, manager John MacDougall is the best performing in the AIC Japanese Smaller Companies sector, returning 9.05 per cent to April 12 2012.

Challenges

He says: “Growth expectations have been pared in the wake of last year’s earthquake and tsunami while the strong yen and state of the global economy has clearly created challenges for exporters. Japanese small caps outperformed their larger peers last year because investors were seemingly more concerned about the impact of a faltering global economy on the larger Japanese exporters than about domestic demand.

“In spite of the events of 2011, some areas of the Japanese economy experienced very impressive rates of expansion, such as e-commerce, smartphones and energy efficient products.”

Looking across the full range of market capitalisations, smaller companies have outperformed their mid and large-cap cousins in the year since the disaster. The AIC Japanese Smaller Companies sector has returned an average of 11.9 per cent compared with the AIC Japan sector, which delivered 9.37 per cent over the same period.

However, these market movements might have left some larger multinational firms looking relatively good value. Andrew Rose, manager of Schroder Japan Growth investment trust, which is in the AIC Japan sector, says: “2011 presented Japan with more than its fair share of trauma.

“The hit to consumer confidence and supply disruption which affected some industries was a significant negative for the economy.

“The stockmarket, however, remains attractively valued and a laggard relative to global markets. This makes it well positioned if global economic conditions sustain their early signs of improvement.”

The year 2011 marked the first annual trade deficit in Japan since 1980, coming in at ¥2.5trn (£19.5bn), or roughly 0.5 per cent of GDP – a sign of difficult times for Japanese multinationals’ export businesses.

However, Pinakin Patel, client portfolio manager for the JPMorgan Japanese investment trust in the AIC Japan sector, predicts that as production normalises, especially in the automobile sector, the trade balance will move back into a surplus in the second half of the year.

“The Japanese yen remains in a tight trading range versus the US dollar. Prime minister [Yoshihiko] Noda’s call [earlier this year] for a weaker yen was dealt another blow when the US Federal Reserve added 18 months to its expected period for holding policy rates at near zero, which started in December 2008, until late 2014.