Investors continue to invest in Japan as they keep one eye on the outcome of Abenomics, the reform agenda implemented by prime minister Shinzo Abe.
Mr Abe has received mixed reviews about whether his reforms have been successful in turning around the economy’s fortunes. Political stability alone is not enough, and markets now want to see Abenomics deliver.
However, inflows into the IMA Japan sector this year suggest investors are undeterred by any negative sentiment towards the region. Net retail sales at the end of 2013 reached £119m, only to drop to £14m in January 2014. But sales have since picked up, reaching £94m and £92m in February and March respectively.
In the past 12 months to June 18, the MSCI Japan index recorded a loss of 0.02 per cent, lagging MSCI North America and MSCI Europe indices in sterling terms by some way. But in the past three months the IMA Japan sector has secured an average positive return of 4.5 per cent, and in the past month to June 18 that has climbed to an average 6.04 per cent return.
From a macro perspective, Genzo Kimura, economist at Sumi Trust, highlights the country’s GDP growth in the first quarter of 2014, which surpassed estimates. “This can be attributed to stronger momentum from private investments, private consumption and significant increases in capital expenditure from the corporate sector. The recovery remains intact and we expect Japan to keep its solid growth momentum,” he explains.
Mr Kimura says “cash is no longer king” for the corporate sector. “We are instead seeing a move by many corporates to increase their capital expenditure and reinvest in their businesses,” he says.
The Bank of Japan is to maintain its monetary stimulus plan to stay on track to meet its 2 per cent inflation target. JPMorgan Asset Management portfolio managers Shoichi Mizusawa, Nicholas Weindling and Naohirio Ozawa believe the Bank could raise its quantitative easing programme “when required”.
The managers add: “We expect global demand will continue to be led by US economic growth momentum. The European economy appears to have stabilised and there are signs that recovery is starting. This is positive for corporate earnings and, ultimately, the Japanese equity market.”
They acknowledge issues of structural reform, though, such as Japan’s declining population and unsustainable level of public debt, are likely to threaten the economy’s longer-term health.
In a recent St James’s Place Wealth Management market bulletin, communications director Andrew Humphries notes the Japanese government is “poised” to relax constraints on its $1.3trn (£764.4bn) Government Pension Investment Fund. He adds: “Japan is expected to lift the ceiling on equity holdings in August to around 20 per cent from 12 per cent at present, raising the prospect of a major boost for Japanese and worldwide stocks.”
For Scott McGlashan, senior fund manager of the JO Hambro Capital Management Japan fund, the sales tax hike in April has been less severe than feared and he sees opportunities. “The best performing stocks are likely to be domestically orientated,” he suggests.
In terms of domestic demand, property did well last year, and he forecasts that companies in the transport sector will excel this year, adding: “Financials lagged the rally in the first instance and are cheap, so I should think they will do well.”
The phrase “cautiously optimistic” would seem to sum up sentiment towards Japan at the moment then. Those investing in the country through funds may want to take a long-term view of the prospects for the land of the rising sun.
Ellie Duncan is deputy features editor at Investment Adviser
ADVISER VIEWS
Patrick Connolly, Chase De Vere
“There have been so many false dawns in Japan and yet so many people still think this time it’s different. A risk for investors is they sit on the sidelines and regret not jumping in to the new Japan story. Of course, those who jump in might end up battered and bruised and wondering if they’ll ever learn their lesson over investing in Japan.”
Aj Somal, Aurora Financial Planning
“I would recommend clients look to invest a small proportion of their portfolio in Japan, as it gives them a more diversified exposure. Geopolitical unrest with its economic rival China is a concern, but if this eases, and more economic cooperation between the two largest economies in Asia increases, this would be a benefit to all. In spite of the uncertainty over the success of the current economic reforms in Japan, the country still remains on the radar for advisers. Clients should be diversified across all the Asian markets, including Japan.”
