Japan’s voters give Abenomics the thumbs up – what funds are brokers recommending?

23rd July 2013

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Japan has delivered its fair share of false dawns to investors but to date in 2013 it has been a standout performer and the consensus believes the renaissance is far from over writes Philip Scott.

Investor sentiment towards the world’s second largest economy has not been as positive as it is right now for years. But what’s changed?

Spearheading the revolution is Japanese Prime Minister Shinzo Abe, and his radical set of reforms and policies dubbed ‘Abenomics’.

Japan has been trapped in a prolonged period of deflation, where prices and earnings have been falling. While high inflation is bad for an economy, steep deflation is not any better, as people and corporations will not buy something today if they believe it will be cheaper tomorrow. As a result, economic expansion in Japan has gone nowhere as not enough money is being ploughed into the economy.

But since he took office in late 2012, Abe has introduced a three pronged attack – known as three arrows – in a bid to get Japan’s ailing economy out of the doldrums and back to growth. One of these is setting a target of getting to 2 per cent inflation by 2015, the second is a huge quantitative easing programme of injecting a massive 60trillion yen (circa £400bn) a year into the economy, the third is structural reforms.

So far the signs have been good. The Japanese equity market – notwithstanding volatility in May and June – has risen by almost 30 per cent so far this year while the yen has fallen in value, providing a much welcome boost to importers. The Bank of Japan recently delivered a report, regarded as its most positive in some two-years, which pointed to a wider recovery and expansion in the economy.

Abenomics got the thumbs up this week too, when on Sunday the prime minister received an overwhelming vote of confidence, after securing a majority win in the Japanese parliament’s upper house vote. The significance of this is great as it means Japan’s Liberal Democratic Party and its smaller coalition partner New Komeito won a decisive majority and the victory will put the coalition in charge of both houses of parliament for the first time since 2007. Key elements of the prime minister’s plans, most significantly structural reform, need political support, something which the recent election appears to have delivered.

Professional investors are now looking to the future with renewed optimism. Shaniel Ramjee at fund manager, Baring Asset Management says: “Looking ahead, we expect Japanese equities to continue to deliver strong returns over the second half of 2013.”

Tim Gardner, a fund manager at Legal & General Investments adds: “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 first three months of the year.”

Funds

The reinvigorated Japanese market has translated into some robust returns for investors. Over the past year the average Japan fund has delivered a 37 per cent return, 26 per cent of which was achieved over the past six months, reflecting the progress since shortly after Abe’s arrival in office. In comparison, the average UK fund has delivered 12 per cent, over the past half-year.

In terms of what brokers are recommending, Hargreaves Lansdown rates the £1bn GLG Japan CoreAlpha fund, which over the past 12 months has achieved a substantial return of 51 per cent. Also on its recommended list is the £301m Invesco Perpetual Japan portfolio, up 53 per cent over one year. Charles Stanley Direct, also rates the GLG portfolio as well as the £473m JO Hambro Japan fund, up 39 per cent over 12 months and the £599m Jupiter Japan Income portfolio, up 30 per cent over the same period.

Of course, investors need to be wary of any investment sector and not focus on chasing past performance. Japan’s huge policy of pumping easy money into the economy is untested and it has not been immune to the volatility that plagued markets in late May and June but it is certainly something to consider.

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