Coming into 2017, multi-asset and global equity managers and fund buyers listed the value proposition in Japanese equities as a priority. Manager surveys found sentiment on Japan to be persistently high in recent months, but this has yet to be matched by investors putting money to work.
The latest fund manager survey from Bank of America Merrill Lynch found Japan to be behind only eurozone equities in terms of popularity, yet year-to-date the market has stuttered, with the Topix up only 2.5 per cent in local currency terms. UK retail investors redeemed holdings in Japanese equity funds during February.
Over one year, the market is up 14 per cent, with a surge post-November having tailed off this year. By contrast, year-to-date the MSCI World index is up 5.5 per cent, the S&P 500 5.8 per cent and MSCI Europe ex-UK over 6 per cent.
Japan’s Ministry of Finance data showed foreign investors had been net sellers of Japanese equities so far this year, to the tune of JPY1.9trn (£13.7bn).
Rory McPherson, head of investment strategy at Psigma Investment Management, said the market was being held back because of international managers still failing to recognise the investment case.
“Foreign flows have been weak and have tended to go towards US or Europe,” said Mr McPherson. “Domestic flows [in Japan] have been very good but this has been over-ridden by foreign [out]flows.”
Others, such as Rathbones multi-asset manager David Coombs thought the inflationary and growth agenda set by prime minister Shinzo Abe since 2012 could have started falling off the radar.
As ever with Japan, currency has played a part. A weaker yen was always part of Mr Abe’s economic agenda, and a necessity for equity investors given the near-perfect correlation between a weakening currency and rising stock market. However, year-to-date the yen is up between 3-5 per cent against the euro, sterling and dollar.
Some managers have been upping weightings regardless, in anticipation of a weaker yen and other market participants soon following suit. JPMorgan Asset Management recently increased its overweight position in Japanese stocks.
John Bilton, global head of multi-asset strategy, said continued expansionary fiscal and monetary policies, alongside economic growth, would boost the region.
“This year could see Japanese stocks in the sweet spot as a combination of an upswing in global growth and capital expenditure coincides with better domestic momentum and a gradually softening yen. Japan has the best earnings momentum of any market just now.”
Mr McPherson was also bullish, with Japan the largest equity overweight. He cited economic prospects but also suggested Mr Abe’s policies had much more time to run.
Given the currency’s significance and hedging historically being pivotal to achieving returns, both stressed the return to using sterling hedges this year.
Japan’s quantitative easing policies throughout 2013 and 2014 weakened the yen, meaning hedged share classes significantly outperformed non-hedged share classes. However, this relationship completely reversed in mid-2015.
Mr McPherson’s exposure through the Goldman Sachs Asset Management Japan fund was hedged back to sterling given his expectation the yen would again weaken against the UK currency.
However, Jon Cunliffe, chief investment officer at Charles Stanley, said earnings growth from Japanese companies was not specific to Japan, but merely reflected higher earnings globally.
“Corrosive disinflation” was still holding the country back, he added.
