Macro concerns from the emerging markets have caused developed world indices to nose-dive so far in 2014. While Japanese equities enjoyed a stellar 2013, it has been the worst hit market in this year’s correction.
The TSE TOPIX and the IMA Japan sector have both lost more than 7 per cent so far in 2014 while the FTSE All Share, S&P 500 and the MSCI Europe ex UK index have only fallen by around 4 per cent.
Performance of sector vs indices in 2014
Source: FE Analytics
Despite those losses, a number of leading industry experts – such as Seven Investment Management’s Chris Darbyshire (pictured) – say that now is a perfect time to buy Japanese equities.
Darbyshire says there is no real rhyme or reason for Japan’s recent poor performance given the country’s economic backdrop, and as a result the correction will be short-lived.
“Don’t be put off by the headlines and the sell-off in markets over the last two weeks – investors are finding it necessary to choose very selectively from the relevant information in order to justify market behaviour,” Darbyshire said. “It’s rare that one encounters a market so obviously driven by sentiment rather than hard data. The worst-performing stock market over the last month? Japan.”
Darbyshire is puzzled as to why the poorer growth outlook and currency weakness in the emerging markets has had such a negative effect on the likes of Japan, and therefore suggests that the recent sell-off is due to investors taking profits from last year’s gains.
“The very fact that developed markets have also sold off suggests this is a general concern, but no one is arguing that the outlook for developed markets is deteriorating,” he said.
“Taking Japan as an example, recent economic data has been strong. Japanese industrial production was up 6 per cent in the year to November and should accelerate further in the coming quarter. Construction and machinery orders have surged, housing starts are rising and inflation is back.”
“Abenomics is back on track,” he added.
Paul Chesson, who manages the Invesco Perpetual Japan fund, agrees with Darbyshire and says that the outlook for the Japanese market looks even stronger after the recent correction.
“While there are a number of short-term influences that have contributed to the market’s recent weakness, including a strengthening of the yen, general concerns about the impact of QE tapering by the US Federal Reserve and volatility in some emerging market currencies and equity markets, our reasons for being positive on the outlook for Japanese equities remain in place,” Chesson said.
“It is also worth remembering that these declines have come after a sustained period of strong performance for Japanese stocks, which saw the Topix index gain 51.5 per cent in local currency terms in 2013.”
Chesson say that the main reason to be bullish on Japan is its valuation. However, he also points to the fact that the Japanese corporate sector has been able to deliver decent earnings growth, something that the UK and US have so far failed to do.
The recent strengthening of the yen against the US dollar has contributed to the fall; however, the manager says this trend is unlikely to continue.
The major reason for this, according to Chesson, is because the government and the Bank of Japan will continue to keep monetary policy extremely loose in order to reflate the economy, while the Fed is expected to further reduce its quantitative easing package.
“Japanese markets have been weak in 2014 so far, but we believe that valuations are attractive, the economic backdrop in Japan and overseas should be broadly supportive, and earnings growth remains robust,” Chesson said.
“As such, we continue to have a positive view on the potential for Japanese equities.”
Chesson has managed the Invesco Perpetual Japan fund since the turn of the century. According to FE Analytics, the now £324m fund sits firmly in the top quartile of the IMA Japan sector over 10 years and ever since Chesson took charge.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Invesco Perpetual Japan has also been one of the biggest beneficiaries from the increased appetite for risk, delivering top-quartile returns in 2012 and 2013. However, it has been one of the sector’s hardest-hit funds in this year’s correction.
It has an ongoing charges figure (OCF) of 1.69 per cent and requires a minimum investment of £1,000.
Skerritts Wealth Management’s Andy Merrick’s told FE Trustnet earlier this week that the sell-off is nothing more than a pause in a bull market.
He too thinks Japan now offers the best opportunities of any market and as a result is looking to add to his current holding in the Neptune Japan Opportunities fund.
“Based on my conclusion that it’s just a dip, and also based on the fact that Japan has born the brunt because of the sharp rise in the yen versus emerging market currencies, I’d be very tempted to top up the Neptune Japan fund which is hedged and has thus suffered quite badly,” Merricks said.
“I wouldn’t be at all surprised to see the Bank of Japan increase its QE quite quickly to help the currency weaken, as it is a key 'arrow' of Abenomics. We were expecting a bout of QE in Japan in April to offset the VAT increase due then.”
“It may well happen earlier,” he added.
Neptune Japan Opportunities is headed up by Chris Taylor, who kept his FE Alpha Manager status in this week’s rebalancing.
Taylor has managed the £236m fund since May 2005. Our data shows that over that time it has been the best performer in the IMA Japan sector with returns of 144.42 per cent, beating its benchmark – the TOPIX – by more than 100 percentage points.
Performance of fund vs sector and index since May 2005
Source: FE Analytics
It also boasts top-quartile returns over one and three years.
Taylor has a large overweight position in some of Japan’s dominant industrial exporters, as he says that they should perform strongly as the currency continues to weaken.
The fund requires a minimum investment of £1,000 and has an OCF of 1.59 per cent.
