Case for investing in Japanese equities

This article is part of
Guide to Japanese equities

Case for investing in Japanese equities

How can advisers instill confidence when it comes to talking to clients about investing in Japanese funds?

For some managers, such as David Jane, fund manager on Miton's multi-asset fund range, there have been few reasons to pile into Japanese equities in recent years but there may be hope on the horizon.

He says: "We have no exposure to these, having sold out at the end of 2015 and early 2016. Before, we had a big exposure for the (prime minister of Japan) Shinzo Abe rally.

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"The size of the economy and the stock market makes Japan difficult to ignore so we are unlikely to maintain our zero exposure in the medium term, given these attractions."

There are two main reasons underpinning the confidence that Nathan Gibbs, client portfolio manager of Japanese equities for Schroders, currently has in Japan.

He explains: "The combination of aggressive monetary policy and strong fiscal stimulus should be very supportive for the equity market.

"Also, improved governance and shareholder payouts are a strong, long-term incentive for investors, especially as current valuations look reasonable, given the profit growth we expect to see over the next couple of years."

For Cyrique Bourbon, portfolio manager at Morningstar's Investment Management group, Japan is the home of "several market-leading companies" which are cash rich and increasingly focused on shareholder returns. 

This is a key benefit to discuss with income-hungry clients, he suggests.


For Ben Willis, head of research for Whitechurch Financial Consultants, there is the potential of greater recovery among Japanese equities. 

He comments: "In this quantitative easing-influenced world, all risk assets have risen in value, driven by the low interest rate environment that has been with us for eight years. 

"This has made it more difficult to identify opportunities between and within asset classes. On a relative basis, Japanese equities are relatively cheaper than other developed market equities, and offer the potential for recovery. Whether this occurs or not remains to be seen."

Katsunori Kitakura, strategist at SuMi Trust, says: "The Japanese like gradualism and tend to follow the 'first mover' mentality. So we believe advisers should focus on active, bottom-up stock pickers who can monitor the ongoing positive developments at a company level within Japan and take advantage of the longer-term opportunities that exist within Japanese equities."

Macro woes?

It is difficult for your clients to ignore the macro environment and this must be factored into any long-term financial planning decisions.

Kwok Chern-Yeh, head of Japanese equities at Aberdeen Asset Management, admits Japan's macro environment is "clearly unusual" and one reason for the confusion in markets at the moment is that policy makers seem to be treating structural issues as if they were cyclical - which could cause investors to forget how deep and mature the stock market is.