BLOG: Give Japan the benefit of the doubt
Following disappointing GDP figures out of Japan — Q3 GDP was expected at 2.9 per cent but came in at -1.6 per cent — and potential political uncertainty we are asking whether it’s time to review our overweight allocation to the nation. Whilst we are not super-bullish on Japan, we do believe that there is value to be had, although much will depend on whether the authorities delay the consumption tax.
Progress with reforms is slow, and Japan’s lurch back into a technical recession has not helped. But Japan has never been a straight-forward investment, and we believe that ‘Abenomics’ still represents a credible strategy.
Its equity market has also been afforded boosts from recent currency weakness (given the figures, the surprise bout of quantitative easing now makes sense); a lower oil price and a government pension investment fund that will double its equity allocation to 25 per cent. Future boosts to GDP may come from agricultural reforms and increased defence spend. But we should not forget that exports, industrial production and wages remain bugbears for Prime Minister Abe, and these issues cannot be resolved quickly. For that reason, we see continued volatility in the coming months.
If investors are prepared to take a leap of faith in Japan’s long-term recovery, then this dip might provide a good entry point. In terms of a value play, Invesco Japan holds fairly high weightings in financials. Jupiter Japan Income is positioned in a similar way. Its overweight in financials has now started to pay off. JOHCM Japanfund plays key recovery themes, with most of the ideas sought at the lower end of the market-cap spectrum, where growth potential is greater. This fund can work as an excellent complement to many large-cap value funds.
The Baillie Gifford Japan Trust too carries a focus on small and mid-cap growth names, and is worth considering on a small discount. Finally, JPM Japan Investment Trust and OEIC manager, Nicholas Weindling, remains confident in the end of a deflationary Japan. His funds are overweight in financials and real estate, as he expects a rebound in consumer spending.
Japan looks cheap, and at this point, we are prepared to give it the benefit of the doubt. But we will not hesitate to review our position if the recovery and valuations start to look especially vulnerable.
David Coombs is head of multi-asset investment at Rathbones.