Edward Smith, head of asset allocation research at Rathbones, has been increasing his exposure to Japanese equities in recent months.
Mr Smith said he is only “neutral” on his allocation to equities. He said that while many of the current global economic indicators are positive, data which can act as a signal for more medium term turbulence, notably money supply growth, has begun to weaken.
"Money supply growth slowing [as well as other data] indicates an economic recession may be nine months away," he said.
But he noted that in Japan, the economic indicators remain very positive and company earnings have now started to improve alongside the wider economic data.
Mr Smith pointed to an opportunity because despite the economic and market data “shooting the lights out”, he said Japanese equities are "barely higher than they were two years ago”.
We believe investors should take a closer look at Japanese equities and consider the value of being active in this growing market.Katie KochHe added that Japanese equities have often acted as a “safe haven” in times of market stress, and he expects this would mean some protection for investors if global equity markets suffer a downturn.
Mr Smith said the outflows from Japanese equities in 2016 were at “recession levels” and he expects international investors to start allocating more capital to the market in the coming year.
He funded the extra allocation to Japanese equities by reducing holdings in high yield corporate bonds and emerging market corporate bonds.
Mr Smith said the yields of those bonds have fallen as investors have been willing to take more credit risk as their view on the prospects for the global economy becomes more optimistic.
Earlier this autumn, Mr Smith suggested inflation was going to be a core theme for investors to consider, he told FTAdviser in a video interview.
Ken Maeda, head of Japanese equities at Schroders noted that Japanese GDP grew in September, the first time in 15 years that the Japanese economy grew for seven consecutive quarters.
He said he expects the gently rising inflation in the country to allow Japanese companies to raise prices, something that has not been possible in recent years when the country has been gripped by deflation.
Katie Koch, global head of client portfolio management for fundamental equity at Goldman Sachs Asset Management pointed out that to the middle of October, Japanese equities outperformed US equities in US dollar terms, with the main Japanese exchange the TOPIX returning 18 per cent, while the S&P 500 returned 15.9 per cent.
"Looking ahead, we believe prime minister Shinzo Abe's re-election will continue this positive momentum, focusing on continued economic and corporate reform aimed at boosting Japan's growth.
"With this in mind, we believe investors should take a closer look at Japanese equities and consider the value of being active in this growing market.
“In addition to solid fundamentals, corporate governance reforms are resulting in more shareholder-friendly actions.
"Mr. Abe's government introduced a corporate governance code as a set of rules that corporations are expected to follow or provide an explanation of why they didn't. This has resulted in more independent directors on company boards.”
David.Thorpe@ft.com
