Following some lacklustre numbers is Japan a ‘buy’ once again – and what are the recommended fund plays?

6th October 2014

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Japan may have been throwing out of some sluggish economic data of late but some experts believe the ‘land of the rising sun’ represents a good buying opportunity for the long-term investor.

Rathbones’ head of multi-asset investments David Coombs admits that he is not “super-bullish on the region” but even so, he highlights that Japan is trading on a significant forward discount where it is 40% cheaper than the US.

He says: “We believe that there is value to be had. Also if you believe that the third quarter economic figures will be strong, then this dip provides a good entry point.”

Progress with reforms dubbed ‘Abenomics’ after Japan’s Prime Minister Shinzō Abe, has been slow. The strategy was introduced in a bid to kick-start the Japanese economy which has endured a prolonged period of deflation.

But while 2014 has witnessed some very mixed economic data emerge from Japan, the recent reporting season was on the whole very positive notes Coombs. He adds.  “Japan has never been a straight-forward investment but we believe that ‘Abenomics’ still represents a credible strategy and there has been some progress.”

Japan’s equity market was afforded a slight boost following the announcement that its government pension investment fund will increase its domestic equity allocation from 12% to 20%. A number of sizeable pension funds may also shift their mandates in line with these changes, thus providing additional impetus adds Coombs.

However, he cautions that investors must still be aware that much will depend on the strength of the economy in the third quarter, as well as Abe’s decision to raise sales tax again.  In fact many have blamed the introduction of the tax in April for the poor data points in August.

“The success of the reform programme rests on a demonstration into the third quarter that the recovery remains on track,” says Coombs.  “Although possible boosts to GDP may come from agricultural reforms and increased defense spend we should not forget that exports, industrial production and wages remain bugbears for Mr. Abe, and these issues cannot be resolved overnight. For that reason, we could see a good deal of volatility in the coming months. Investors will require patience.”

For investors wishing to access Japan, Coombs highlights some noteworthy picks:

For a value play…

“A good alternative to the GLG Japan Core Alpha, which soft closed in recent weeks, is the Invesco Japan, which also holds fairly high weightings in financials and remains on a reasonable valuation.”

For those with a high conviction in a strengthening recovery…

“We believe JOHCM Japan Fund is an excellent way to gain exposure, as it is perhaps the best positioned to benefit from a significant turnaround.  The fund plays key recovery themes, but most of the ideas are at the lower end of the market-cap spectrum, where the potential for growth is significantly greater.  Moreover, this fund works as an excellent complement to many of the other recommended large-cap value funds by not holding the major players in the top 100, which feature so heavily in most other portfolios.”

“The Baillie Gifford Japan Trust would be a beneficiary of a pick-up in the market, and has a focus on smaller and mid-cap growth names.  It is trading around NAV, and if investors are able to get exposure at this level, or on a small discount, it is worth considering as the trust typically trades at a mid- to high single-digit premium.  Again, it works as an excellent compliment to other names which hold very little in the large cap space.”

For income…

“Jupiter Japan Income is positioned in a similar way. Its overweight in financials has started to pay off, following a period of prolonged underperformance, this fund yields just below 2%.  Finally, JPM Japan Investment Trust and OEIC manager Nicholas Wiendling remains confident in the end of a deflationary economy in Japan, and his funds are overweight in financials and real estate, expecting an imminent rebound in consumer spending.”

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