Investors should stick with Japanese equity funds throughout the year, according to Nouriel Roubini of Roubini Global Economics, but hedge out swings in the value of the yen in anticipation of further quantitative easing (QE).
Despite a recent pull back, Japanese equities have been one of the best developed markets for investors’ cash thanks to a host of fiscal and monetary reforms as well as a renewed QE programme by the Bank of Japan.
According to FE Analytics, year to date the Japanese index – the Topix – has gained 18.7 per cent while the IA Japan sector’s average rise is 18.39 per cent.
Performance of index and sector in 2015
Source: FE Analytics
Roubini Global Economics chairman Nouriel Roubini, who earned the nickname ‘Dr Doom’ by predicting the financial crisis, has been bullish on Japan for some time but has started to warn more recently about the potential for currency headwinds for global investors.
“Japanese equity remains our top developed-market equity pick,” his consultancy firm said in a recent update.
Part of the firm’s bullish outlook for Japanese stock markets is an anticipation that the QE programme designed to bolster the economy will be increased later in the year, while the ongoing move into equities by the Japanese government pension fund – the largest pool of investable cash in the world at £850bn – will also add a boost.
“In Japan, more monetary easing and the government pension investment fund’s increased allocation to equities should continue to push up share prices,” the update said.
But it recommends that investors hedge out currency risk, following the deprecation of the yen that eroded some gains in Japanese stocks over the past month or so. The group argues that a “flood of liquidity” is likely to keep the yen under pressure as any tightening of policy is not expected until 2016 at the earliest.
Against the pound the Japanese yen has been weaker in the past few months and is currently down on the year, continuing a trend that has seen it lose nearly 10 per cent in value over one year.
Performance of sterling versus yen over 1yr
Source: FE Analytics
When it comes to funds, the best performer in the IA Japan sector over 2015 so far is the £1.3bn GLG Japan Core Alpha fund, which hedges out currency movements. It is up 26.62 per cent compared to the Topix’s gain of 18.7 per cent and the IA Japan sector’s average of 18.39 per cent.
Performance of fund, sector and index in 2015
Source: FE Analytics
Angus Campbell, senior analyst at FXPro, says the deprecation of the yen is proving a thorn in side of consumption growth, which is a key part of the Bank of Japan’s (BoJ) strategy to boost markets and increase inflation.
“The BoJ’s efforts to get inflation back to 2 per cent are proving harder than was expected as the ever declining yen is causing Japanese consumers, who for years have been used to falling prices, are grappling with higher import costs pushing up the price of high street goods,” he said.
“On top of this the consumers have had to deal with their pay packet decreasing as a result of recent tax hikes so they not only do they have less money, they are keeping more of it in their pocket.”
“At least there [is] a bright spot from industrial production and unemployment and the Japanese economy had a strong first quarter, but it’s still a long way from where both prime minister Abe and the BoJ want it to be.”
Anna Stupnytska’s, economist at Fidelity Worldwide Investment, says weak consumption data persists in Japan and shows no signs of better momentum in the economy.
“Consumption data was weaker on the margin as nominal retail sales fell sharply in March, and core consumption - close to the definition of household consumption in GDP - was flat in Q1. But real household spending rebounded sequentially in March, with better growth across a broad range of categories,” she said.
“March labour market data was mixed, with the unemployment rate falling but the labour force participation rate declining at the same time. Wage growth remained stagnant as overtime pay, which had been supporting overall wage growth until now turned negative. Real wages continued to fall sharply.”
“Disappointment continues, as the domestic economy remains weak with negative real wage growth weighing on incomes and consumption.”
Stupnytska notes that the Bank of Japan recently revised down inflation expectations to 0.8 per cent and pushed back the timeline for achieving the 2 per cent inflation target to the first half of 2016.
“The BoJ is likely to hold back additional easing for now, at least until spring wage negotiations are out of the way and wages are hiked this summer,” she added.
“If that proves insufficient to boost consumption and growth in the months ahead, they will need to do more later in the year - or, alternatively, they might choose to revise down the price outlook and the inflation target timeline once again.”
“Either way, it is hard to see how we can get a self-sustained recovery from here without more policy action (the ‘three arrows’) and/or a much stronger rebound in global demand relative to current expectations.”
