InvestmentsFeb 12 2013

Japan continues to look cheap

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Government intervention has resulted in the Bank of Japan implementing an unlimited asset purchase programme, which will start in 2014 when the current asset programme finishes.

Government intervention has resulted in the Bank of Japan implementing an unlimited asset purchase programme, which will start in 2014 when the current asset programme finishes. Japan has also announced a 2 per cent inflation target.

The aim of these measures is to stimulate growth. Quantitative easing (QE) should help lower the value of yen against other currencies such as the euro, US dollar and sterling.

A weaker yen would be good news for the country as it is a major exporter and a weak currency makes their exports more competitive. However, there is currently a race to the bottom between sterling, the US dollar and the yen as each country is printing money.

Japan has been under a cloud of pessimism for several years. A deteriorating outlook in China and the earthquake and tsunami in 2011 caused severe volatility while a strong yen continued to hamper exports.

The Topix index of Japanese shares has lagged other markets and since the market’s nadir in March 2009 it has risen by 22.5 per cent. The FTSE 100 is up 74 per cent and the S&P 500 is 93 per cent in that period.

The Japanese market has had a recent run, however much of this has been missed by UK investors as the currency has gone against them. Japan continues to look cheap with earnings forecast to grow 10 per cent this year. Japan remains the perennial underachiever but there are indications the politicians are willing to do more to achieve growth and a weaker yen will help exports.

Japan has had a strong run recently, although this is from a very low base, and there is still the potential for further gains. Investing in Japan might seem intensely uncomfortable given the history of the past 20 years.

One thing is for sure – you rarely make money by buying very expensive stock markets, and in buying Japan you are doing the exact opposite.

Of course setting inflation targets is not the same as meeting them, the Bank of England also has a 2 per cent inflation target but hasn’t met it in seven years, although it continues to overshoot that target.

Currency plays a major role in Japanese investing as a weak yen usually coincides with a rising stockmarket, so investors with exposure to the yen gain from stockmarket rises, but lose out from the falling currency. A hedged fund tends to be more volatile though so might not suit all investors.

With that in mind, a good recommendation would be the recently reopened GLG Japan Core Alpha fund. Manager Stephen Harker has continued to reduce the fund’s defensive holdings and increase exposure to more economically-sensitive areas.

The portfolio is becoming increasingly biased towards technology stocks, which have recently lagged defensive sectors and this has affected performance. However, the manager believes these are attractively valued and could outperform. Investors can access either a currency hedged version or unhedged version of this fund.

Adrian Lowcock is senior research analyst at Hargreaves Lansdown