Investing in Japan funds at the beginning of 2015 would have bagged you some of the highest returns of any portfolios in the Investment Association’s 3,500 strong universe through the year. Doing so at the beginning of this year, however, would have so far clocked up the toughest losses.
According to FE Analytics, the average fund in the IA Japan and IA Japanese Smaller Companies sectors have, respectively, lost 11.04 and 9.01 per cent year to date. The Topix index is down 10.49 per cent as a point of comparison.
Performance of sectors and index in 2016
Source: FE Analytics
Conversely, last year they made strong gains with the likes of Hideo Shiozumi’s Legg Mason
IF Japan Equity fund making close to 50 per cent in the IA Japan sector and only one portfolio among the 62 in the peer group losing money: Chris Taylor’s Neptune Japan Opportunities fund.
Taylor runs a fairly concentrated portfolio consisting of between 40 and50 stocks but he also makes use of derivatives to reflect his opinion that the yen is on a long-term trend of weakening which partially accounts for his lack lustre performance in 2015 and 2016 – where he is again the worst performer in the sector.
The wider market falls have not been so harsh on Legg Mason IF Japan Equity which is down just over 9 per cent, behind the index’s 10.49 per cent fall.
Since the middle of August 2014 the Yen has been strengthening against the dollar with a huge weekly swing evident earlier this month thanks to the shock policy announcement – brought into force to day – by the Bank of Japan [BoJ] to make interest rates negative and thereby charge depositors.
Performance of dollar versus yen since 12 August 2015
Source: FE Analytics
Recent days have also seen wild swings in the equity market with the index up a whopping 7 per cent in just one day yesterday.
Performance of index in February 2016
Source: FE Analytics
Joshua Mahony, market analyst at IG, says the 1,000 point rally in Japan is “incredible but unlikely to last”.
“With overnight GDP and industrial production data once more highlighting the continued failings of Abenomics, this is perhaps more of a speculative and short-term rally off the back of higher monetary policy expectations rather than anything substantial,” he said.
Adrian Lowcock (pictured), head of investing at AXA Wealth, says this volatile behaviour and recent falls of 1.4 per cent shown in gross domestic product data for the last quarter of 2015 raises concern over the success of the flagship government economic policy dubbed Abenomics.
“It is likely to leave the door open for more quantitative easing, whilst a weaker Yen is good news for Japanese exporters. The Nikkei 225 has given back all of its gains made last year in Sterling terms, and even more in Yen terms. However, he says the region remains attractively valued compared to other stock markets."
“Investors need to tread carefully as some areas look expensive, such as good quality growth companies, whilst cyclical stocks look cheaper. In addition the country is still sensitive to the global economy and especially growth in China,” he added.
Paul Markham, global equities manager at Newton Investment Management, agrees and says despite the recent volatility, there are reasons to be optimistic about Japanese equities.
“The weaker yen has provided a tailwind for the large export-led corporates – essential, given their status as among the largest taxpayers in Japan, to the repair of the government’s balance sheet – and has encouraged a significant uplift in inbound tourism,” he said.
“Improvements in corporate governance and shareholder returns are also encouraging. We see these events as positive and remain constructive on Japan in spite of the hurdles it faces; and see stock picking as crucial.”
“In Japan, at least as much if not more than in other markets, differentiating between individual businesses can often yield strong results; and a weaker market, engendered by global risk aversion and a strengthened Yen, may represent an opportunity to add.”
Keith Wade, chief economist at Schroders, says the latest GDP news will increase pressure on the country’s central bank to justify its current policy stance.
“Governor Kuroda can point to the decision on 29 January to introduce negative interest rates. However, so far all they have to show for this is a flatter yield curve, while the yen has strengthened and the equity market has weakened.”
“On balance, it is difficult to see any net financial stimulus from the BoJ’s action to date. Prime Minister Abe must be having increasing doubts about the next increase in the consumption tax scheduled for April 2017."