Japan’s prime minister Shinzo Abe has been rolling out his reform agenda, named ‘Abenomics’, since his appointment in December 2012 to a mixed response from markets.
While the first two ‘arrows’ of reform which encompassed monetary policy and fiscal policy were deemed largely successful, the ‘third arrow’ of structural reform has been met with some disappointment by investors.
Certainly, the country’s economy can be said to have been pulled from a lengthy period of deflation but there are mutterings that Abenomics has stalled. Some of the most recent figures to have come out of Japan showed that the country’s first quarter growth for 2014 beat expectations though. The country posted a 1.5 per cent rise in GDP in the first three months of the year, ahead of the forecast 1 per cent growth for the period. The data revealed a 2.1 per cent rise in consumer spending was behind the impressive growth story.
But investors have cautioned that the better-than-expected GDP figure was largely driven by consumer spending ahead of a hike in consumption tax to 8 per cent at the beginning of April.
Legal & General Investment Management economist Hetal Mehta points out that sales receipts at large Japanese stores soared to 17-year highs in March “as shoppers rushed to make purchases ahead of the hike in VAT”.
But she adds: “Concerns that the increase in consumption tax – up to 8 per cent – would counteract the Bank of Japan’s efforts to boost inflation towards its 2 per cent target were allayed as core inflation held steady in the latest data released.”
Andrew Humphries, marketing and communications director at St James’s Place, notes that the 1.5 per cent growth figure is the economy’s best quarterly growth figure in nearly three years.
“However, there are fears that last month’s sales tax prompted a consumer buying spree ahead of its introduction on 1 April, and growth could fall back in the second quarter,” Mr Humphries warns.
The International Monetary Fund (IMF) forecast in its recent World Economic Outlook that the implementation of structural reform in Japan will be “essential to achieve the inflation target and higher sustained growth”. Its current estimate for GDP growth in the region is that it will hold steady at 1.4 per cent this year, only to fall back to 1 per cent in 2015 and 0.7 per cent in 2016.
Meanwhile, Ms Mehta highlights the Japanese government’s announcement of the “revamp” of its 128trn yen Government Pension Investment Fund. It was set up in April 2006 to manage and invest the reserve funds of the Employees’ Pension Insurance and the National Pension, replacing the previous Government Pension Investment Fund after it was dissolved.
Ms Mehta explains: “By appointing two new members, who suggested a broader investment strategy, to head its investment committee, investors are expecting the fund to diversify its huge JGB holdings and add to domestic equities and overseas assets.”
At a fund level, one recent Japan closure and another launch in the sector suggests investors are split over the economy’s potential to deliver returns. Hermes confirmed in May that it has closed its Japan Equity fund, citing insufficient demand. Referring to its Japan equity strategy, the firm said it did not see “sufficient demand for the capability”.
However, at the end of March 2014, JO Hambro Capital Management launched the JOHCM Japan Dividend Growth fund, having observed that dividends in the country are “climbing”.
Fund picks
Jason Hollands, managing director of Bestinvest, suggests three funds for investors who want to play Japan.
CF Morant Wright Nippon Yield
Mr Holland suggests this fund is one for investors “wanting to play the stakes” and likes the Morant Wright Nippon Yield fund for smaller companies. The team at Morant Wright only invest in Japanese equities and have a stock selection process based on fundamental analysis. The £148m fund aims to generate returns by investing in undervalued Japanese companies and currently holds Sumitomo Mitsui Financial Group and Aoyama Trading. It has outperformed the IMA Japan sector over the medium term, with a three-year return to May 23 of 32.86 per cent, placing it third among the IMA Japan sector.
GLG Japan CoreAlpha
This £1.2bn fund is managed by Stephen Harker, who has more than 25 years of experience investing in Japan, and launched in January 2006. Its three-year performance to May 23 puts it in the second quartile of the IMA Japan sector with a return of 18.06 per cent, although over 10 years the fund has returned 94.55 per cent, placing it top quartile. The manager, who is assisted by Neil Edwards and Jeff Atherton, looks for capital growth by investing in the quoted securities of companies operating in Japan. Among its top-10 holdings are Mitsubishi UFJ Financial, Nintendo and Canon.
JO Hambro CM Japan
Scott McGlashan and Ruth Nash manage the £587.5m JOHCM Japan fund, pursuing a stock-picking approach with a small and mid-cap bias. A common theme is to find companies where there is a catalyst for re-evaluation by investors, says Mr Holland. The fund, which launched in May 2004, has been “soft closed” to new investors. According to FE Analytics, it has delivered a return of 23.62 per cent over three years to May 23, ranking eighth among the IMA Japan sector funds. The largest sector weighting in the portfolio is to manufacturing at 41.34 per cent.
