Global equity fund managers are looking to beleaguered Japan as a potential source of good performance in 2015, in spite of its latest slide into recession and a downgrade to its government debt rating.
Managers are betting that fresh central bank stimulus efforts will be enough to disprove the doubters and lift the Japanese economy out of its slump.
Jeremy Podger, manager of the £1.5bn Fidelity Special Situations fund, noted that Japan faced “economic challenges”, but said the outlook remained “interesting”.
Mr Podger held 11.5 per cent of his portfolio in the country at the end of October, a 4.3 per cent overweight compared with the MSCI AC World index.
“As the Bank of Japan continues to stimulate the economy, policy changes at domestic pension funds should ratchet up demand for domestic equities,” he said.
Toby Hayes, manager of Franklin Templeton’s multi-asset funds, said: “Japan has moved to the next phase of the most extraordinary monetary experiment of all time.
“It is clear the Bank of Japan is now targeting asset price inflation at all costs as the means to lift Japan from its slumber.”
David Jane, manager of the £535.6m Miton Multi-Asset Special Situations portfolio, has made his second-highest holding the Japan Residential Investment Company, which makes up 2.7 per cent of the portfolio. He believes there are more opportunities to be found, too.
“Beyond the large international Japanese businesses there are numerous under-researched companies, many of which exhibit the rare combination of decent growth characteristics and low valuations,” Mr Jane said.
Ratings agency Moody’s fired a shot across Japan’s bow earlier this month by downgrading its government debt from Aa3 to A1, citing concerns surrounding the effectiveness of the country’s economic policies.
In November, Japan reported a second consecutive quarter of negative growth – leaving it in a technical recession.
Prime minister Shinzo Abe in 2012 unleashed a series of radical monetary policy measures – dubbed Abenomics – which include buying up trillions of yens’ worth of government bonds and property-related investments and pushing through structural reforms.
But Mr Abe has had mixed success with the reforms, given a second planned consumption tax rise has now been postponed.
However, Japan’s ¥127.1trn (£681bn) Government Pension Investment Fund has altered its asset allocation, providing a potential tailwind for the nation’s investment markets.
The fund will cut its exposure to domestic bonds from 60 per cent to 35 per cent of its total assets. It will also increase its equity allocation from 24 per cent to 50 per cent.
Meanwhile, several global fund managers are now turning back to China.
Pat Ryan, manager of the £397m Lazard Global Equity fund, thinks the world’s second-largest economy is the best place to find attractive stocks in 2015.
“Rising valuations in developed markets have left the emerging markets increasingly attractive,” he said.
Mr Ryan is particularly keen on Chinese banks, and claimed valuations were “completely skewed”.
Geir Lode, head of global equities at Hermes, agreed. He said China had not been “overbought” and had “room to rise further”.
“If you look at the falling input costs, from the likes of coal and oil, it is like a stimulus for the economy,” he said.
Managers are bullish on prospects of returns from troubled country
Predicting a revival in the Japanese economy has often tended to be a foolhardy move. But the oft-uttered phrase ‘it will be different this time’ seems to be garnering support.
Dogged government support for the Japanese economy is making investment managers bullish on the prospects of returns from the country and many global managers are increasing their exposure.
But Japan, and indeed China, are “trendy answers,” according to Ian Heslop, who runs the top-performing £1.4bn Old Mutual Global Equity Absolute Return fund.
For Mr Heslop, it might be a straightforward call, but he cannot see why managers are not more bullish about the US’s potential performance in 2015.
He said: “[The US has] GDP growth, and employment growth is strong. The only thing we aren’t seeing is wage inflation and we should start to see that come through.
“You can still get 10 per cent from US equities and given the uncertainty globally, that’s a good bet.”
