Gearing up
Japanese equities are one of the assets most geared to rising US interest rates. A strong dollar and weak yen scenario is supportive of Japanese exporters and the index still tends to rise when the yen falls. A weaker yen is good for corporate earnings. Exporters are budgeting for ¥103 (to the dollar), and every five yen of depreciation adds back about 4% to earnings.
Overseas investors play an important role in Japan and have, in the past, led the market upwards or downwards. At present, global investors’ exposure to Japan is at the lowest level in more than five years, while on a technical level the market is attractive. This creates potential for the market to rally.
Shinzo Abe’s economic policies mean the domestic situation also looks likely to provide some support to the market. The Bank of Japan’s quantitative easing programme means there is a large buyer, whatever the conditions. It recently doubled its market ETF buying budget from ¥3trn to ¥6trn. Add to this corporate buybacks, which are running at around ¥9trn, and you get significant committed buying power equivalent to about 4.3% of Topix market cap.
Domestic fund managers are also likely to rebalance their portfolios as the Bank of Japan’s zero-yield policy gains credibility, meaning insurance and pension funds might well have little choice other than to raise their equity allocations.
Funds to watch – 3-year performance
- Legg Mason IF Japan Equity is a high-profile fund in Japanese equities because the performance tends to be either first or fourth quartile. The fund is a high-growth strategy focused on a core list of largely domestic-oriented names with a large allocation to small and mid-cap names at times. It is undoubtedly volatile but has a track record of outperforming when small and mid-cap style is dominant. Not a fund for the faint hearted.
- Experienced manager Stephan Morant has successfully managed CF Morant Wright Nippon Yield to a mid-cap value style. Utilising a focus on price to book, the focused and experienced team seek companies with a minimum yield relative to the market. The fund can be expected to be more aligned to the Japanese business cycle than peers, finding good value opportunities in consumer cyclical names.
- Founding partner, Michael Lindsell (pictured) manages the Lindsell Train Japanese fund to a similar philosophy employed across the group. The strategy invests in companies with proven, sustainable business models that are deemed to have a long-term resilience to short-term market movements. The approach characteristically biases the fund towards the more defensive areas of the market that offer typically more stable returns.
