Talking Point  

Why Japanese equities are attractive for cautious investors

Why Japanese equities are attractive for cautious investors
Pexels/Tomáš Malík

Cautious investors have many reasons to like Japanese equities in the year ahead, according to Simon Edelsten, who runs the £500m Mid Wynd investment trust, a global equity mandate. 

Edelsten said the yen, the Japanese currency, traditionally does well in times of market turbulence. This is because many investors engage in a “carry trade”, where they borrow in yen at low Japanese interest rates, and use the capital to buy US government bonds, which pay a positive interest rate. 

This enables the investor to pick up a modest, and comparatively risk free return, and boosts demand for the currency. This has led to the yen performing strongly against the dollar over the past week. 

But for Edelsten, an equity investor, such a carry trade is not available in his fund. 

He added that Japanese equities also have appeal in this time of sharp market shocks. 

He said it was a rare example of a developed equity market which was quite cheaply valued right now, and, “there is no inflation and so you do not face the risk other equity markets face of rising interest rates – German inflation just announced at 6 per cent vs zero bond yields paints a rather unstable background for investors.”

He added: “Japan is currently closed, China is held back by Covid, supply chain issues, power blackouts and strain in the construction sector. 

"On a one year view each of those issues is likely to get better than it is today – so a decent chance of recovering economic prospects and less concerns about valuation than other areas.”