9th July 2013
The recent sell-off in Japan has only served to underline the attractiveness of the market fundamentals, argue the managers of J.P. Morgan Asset Management’s two Japan investment trusts, JPMorgan Japanese IT and JPMorgan Japan Smaller Companies Trust.
Nicholas Weindling, who works across both portfolios, says: “This is not a six-month rally – the changes in Japan are long-term and structural in nature. Even though there may be volatility in the short term, we think that after many false dawns for the Japanese stock market, things really are different this time.”
Weindling says that he and his fellow managers, Shoichi Mizusawa and Naohiro Ozawa who co-run the smaller companies portfolio, have never before seen the current level of domestic policy support, not just from the government of Shinzo Abe and his finance minister, but also from the Bank of Japan and from Japanese companies.
“Abe has strong political capital, with better public support at this stage of his leadership than any of the recent incumbents, which should stand the LDP in good stead for the Upper House elections on 21 July. He has a strong agenda of fiscal stimulus, aggressive monetary policy and structural reform,” says Weindling.
“The Bank of Japan, which has historically been unable to address deflation, is now committed to achieving 2% inflation within two years, and its new policies have taken the market by surprise. Domestic reflation is already happening: retail sales are up, particularly in luxury sectors, and financial services employment and business travel are on the rise.”
The fund manager argues that many investors remain sceptical that Japan is changing, in spite of the fact that the country is highly geared to the improving trend in global trade as developed economies finally begin to shake off the hangover of the global financial crisis.
He says there is significant upside potential in a market that remains undervalued, trading at a discount to other major markets on both a price/earnings and price/book basis despite being the only major market where analysts are still upgrading earnings numbers.
Weindling says “The gap between perception and reality in Japan is a real source of opportunity for active managers, as the Japanese market is currently polarised between winners and losers more sharply than it has been in the past, and more sharply than is the case in other markets. With half of all Japanese companies covered by only one sell-side analyst or not covered at all, our on-the-ground presence means we should be better placed to take advantage of the emerging opportunities than some of our competitors.”
Tim Gardner and Alan Thein, co-managers of the Legal and General Multi Manager Income Trust, Legal and General Balanced Trust and Legal and General Multi Manager Growth Trust, are also bullish on Japan’s prospects.
In a note published this week, they say: “Japan’s equity market seems to have recovered some of its “mojo” in recent weeks. The sweeping victory in Tokyo’s late June election for the ruling coalition (i.e. the LDP-Komei alliance) has given the strongest indication to date that the coalition will indeed secure an outright majority in the all important Upper House parliamentary elections on 21st July, thus giving it control of both the Lower and Upper Houses of parliament. This has given a boost to investors’ belief that Prime Minister Shinzo Abe will be able to deliver meaningfully thereafter on the third arrow of his “Abenomics” agenda to provide a programme of structural reforms to boost growth.
“Momentum has been built and maintained since late last year and this is the most concerted and co-ordinated effort to pull Japan out of its economic funk in over two decades. Indeed, the latest data continues to show positive signs. For example: economic growth forecasts for Japan are currently being raised, which is hardly surprising as the Japanese economy grew at the fastest pace among the G7 economies in Q1 2013 with an initial estimate of a 0.9% quarterly increase or 3.5% p.a. that was recently revised up to 4.1% p.a..
“Add to this that the Japanese equity market is not expensive, we remain comfortable with our high conviction position in Japanese equities across all three of our MM Trusts. Indeed, we have used the sell-off in late May and early June to add further to our holdings here.”