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Could your Japan fund be in for 500% upside or have Abe’s ‘arrows’ missed their target?

04 August 2015

It is the best place to have put your cash this year but some think the inertia of QE and a weak yen have run their course.

By Daniel Lanyon,

Senior Reporter, FE Trustnet

Japan has confounded many pessimists in 2015 and gone on to lead the charge in terms of investors’ gains so far this year, being the highest returning sector in the Investment Association taken on average.

The country has generally divided opinion among UK investors for good reason. It has lurched from recovery to stagnation more than any other market over the past 25 years, with an investor in the TOPIX index investing at the start of 1990 still down more than 5 per cent.

Recent successes have been buoyed by the ambitious reforms unveiled by prime minister Shinzō Abe, whose ‘three arrows’ of fiscal stimulus, monetary easing and structural reforms are designed to kick start inflation and economic growth.

Performance of index and sector since 1990


Source: FE Analytics

More recently, following an announcement by the Japanese central bank to unleash monetary easing at the start of this year and surprising the market by declaring an expansion of its asset purchase programme to an annual pace of ¥80trn, things have looked attractive for many investors.

However while the sector and index have shot up ahead of any other part of the market since the start of the year and has generally stayed ahead, the past three months have been stagnant.

Performance of index and sector in 2015


Source: FE Analytics


So has the recovery been put on hold, providing an impetus to sell out and take any profits made?

George Boyd-Bowman, manager of the Neptune Global Income fund, thinks not. The manager recently told FE Trustnet he is keeping a large overweight to Japanese equities in anticipation of several key developments which he says could see the market rocket up 500 per cent over the medium term.

Boyd-Bowman, who has 22 per cent in Japan stocks such as Japanese carmaker Toyota, thinks that inflation may pick up enough to shift Japanese household wealth away from a historic love of cash to hold a material portion of their wealth in domestic equities.

He says demand for equites could see such a phenomenal re-rating, owing to the relative unattractiveness of cash in an inflationary environment, which lowers its spending power in real terms, and a growing culture of dividend payments by Japanese blue-chip firms.

However, the manager says equity ownership would have to approach levels seen in the US to hit this – about 28 per cent of wealth versus a current 5 per cent.

Boyd-Bowman also thinks that further quantitative easing is likely to be announced in the near future, which could offer another leg to the market’s progress.

James Davidson, manager of the JPM Global Equity Income fund, is another peer in the sector bullish on Japan for the untypical reason of dividends.

He has just under double the MSCI World’s 8 per cent weighting to Japan. He notes that the country has not been traditionally thought of as a yield market, but companies are becoming increasingly shareholder friendly.

“[They] have lots of cash on their books and are increasing returning capital to shareholders in the form of dividends. Many are incentivised to significantly raise their return on equity in order to merit inclusion in the Japan Nikkei 400,” he said.

 “Japan Tobacco which has tripled its dividend over the last three years. The company currently returns nearly half of its profits to investors in the form of dividends and this may rise to as much as two thirds. The company has no debt and the government continues to own around 30 per cent of the company.”

Marino Valensise, head of multi-asset at Baring Asset Management, says Japanese stocks have struggled to gain ground in recent months but the longer term case remains for further gains.

“Our conviction in Japan remains unchanged. Recent data have been mixed and wages struggle to gain momentum. However, corporate earnings growth keeps on rolling, beating even consensus expectations. A weak yen and low oil price will make sure this trend continues. In a context where valuations are fair, we continue to believe in this asset class,” Valensise said.

However, not all are so sanguine on the outlook for Japanese equities. Michael Stanes, investment director at Heartwood Investment Management, argues much of the market’s recent success has been prompted by a weakening yen.

Performance of yen versus US dollar over 1yr


Source: FE Analytics

 He doesn’t think there will be further stimulus from the Japanese central bank but says the domestic ownership trend will add some support to market.

“With additional Bank of Japan stimulus unlikely in the foreseeable future, we believe that the trend of yen weakness, which has been closely aligned to the central bank’s quantitative and qualitative easing policies, has run its course in the near term,” he said.


“Notwithstanding our more cautious outlook on the yen, we remain optimistic on the domestic Japanese equity story. Corporate developments are favouring a more shareholder-friendly focus, while prime minister Abe, whose approval ratings have been suffering in the polls recently, remains keen to align the success of his premiership with the stock market’s performance.”

Funds such as Legg Mason IF Japan Equity and Lindsell Train Japanese Equity have led the charge doubling the sector and index since the beginning of the year. The latter is also the best performer over one and three years.

Performance of funds, sector and index in 2015


Source: FE Analytics 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.