Fund Review: Investor sentiment towards Japan picks up

Fund Review: Investor sentiment towards Japan picks up
Monthly net retail sales into the IA Japan sector

Many investors may have thought the appointment of prime minister Shinzo Abe was the start of a new dawn for Japan, but a lack of progress in the ‘arrows’ of reform has put some investors off the country.

Figures from the Investment Association (IA) show that in 2016 investors started the year favourably towards Japan, with positive net retail sales for the first two months before sentiment changed. 

The IA Japan sector posted eight consecutive months of retail outflows, including a peak of £437m in April, before the tide started to turn once again at the end of the year following Donald Trump’s election victory in the US. 

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Given that one of president Trump’s first acts after his inauguration in January was to withdraw from the Trans-Pacific Partnership (TPP) deal, which includes Japan, there may have been lingering concerns over further policy changes. But a bilateral meeting last month has eased those worries. 

Andrew Rose, Japanese equities fund manager at Schroders, says: “The overall tone of the meetings seems to have been warmer than expected. Mr Abe appears to have pledged little more than some job creation in the US, while Mr Trump appears to have downplayed trade issues, at least for the time being. 

“This relatively passive approach from both sides was surprising given previous rhetoric around the TPP trade agreement. The perception that Mr Trump’s policies would have a negative impact on the Japanese economy had caused considerable unease among the population. Mr Abe’s apparent ability to walk away from this visit unscathed is likely to further boost his domestic standing.”

Meanwhile, figures from a recent Bank of America Merrill Lynch Global Research report shows that as of February 23 Japanese equities had recorded seven consecutive weeks of inflows. In addition, Richard Turnill, BlackRock’s global chief investment strategist, noted at the end of February that Japan’s earnings had been particularly “impressive”. 

Looking ahead he suggests the positives for the country are a weaker yen, improving global growth and more shareholder-friendly corporate behaviour. He adds potential risks are renewed strength of the yen and rising wages eating into margins. 

Mark Burgess, chief investment officer at Columbia Threadneedle, points out that the team has been focusing on Japan given the valuations and fundamentals. 

He explains: “In Japan, equities have rerated against a weaker yen and firmer global growth, and corporate earnings upgrades are likely to follow. As a result we expect high single-digit earnings growth and enhanced shareholder returns from Japanese companies.”

While Japan has struggled with stagnation and deflation in the past, research from the Credit Suisse Research Institute’s Global Investment Returns Yearbook 2017 points out the country still has the world’s second-largest equity market as well as the second-biggest bond market.

It adds: “[Japan] is a world leader in technology, automobiles, electronics, machinery and robotics, and this is reflected in the composition of its equity market. One-quarter of the market comprises consumer goods.”