The final pillar in the Japan case is the contrarian opportunity it presents. Sentiment has warmed slightly to the market in recent months, but global managers remain significantly underweight the region. This presents an opportunity for flows to reverse and chase into the market. Price is never the best guide to value, but the fact that the Topix index is broadly at the same level as it was in 1990 – while the US Dow Jones index is 700 per cent higher over the same period – highlights the starkness of the underperformance and the contrarian opportunity it presents.
Like any investment, Japan comes with risks. Specific risks centre around tensions in North Korea, Chinese naval excursions, poor demographics, challenged corporate governance and future tax increases. We believe these risks are not only compensated for within valuations, but are worth bearing given the handsome rewards on offer.
Rory McPherson is head of investment strategy at Psigma Investment Management
Japanese stocks are struggling to find favour
Some commentators have been left bemused by a lack of support for Japanese equities this year as flows fail to tally with professed positivity. Multi-asset and global equity managers, and fund buyers, listed Japanese equities as a priority coming into 2017, while surveys found sentiment on Japan to be persistently strong.
But this has yet to be matched by investors putting money to work. The latest fund manager survey from Bank of America Merrill Lynch even found Japanese equity allocations fell sharply to a net 1 per cent overweight, down from a net 12 per cent overweight in May. The decline comes despite earlier readings showing strong demand for the asset class.
As ever with Japan, currency plays a role. The yen has risen nearly 5 per cent against the dollar year to date, hurting equity returns and sentiment. The Topix index is up 7 per cent in the same period, but US, European and UK stocks have gained 13, 10 and 8 per cent, respectively.