Rallies belie downward trend and risk of ‘value traps’

On December 29, 1989, Japan’s Topix stockmarket index hit its peak. Since then, its annual direction has been unpredictable, but in aggregate it has gone only one way - down.

Hambidge says this attitude towards Japan applies particularly when other asset classes look extremely expensive. The solid record of buying bargains then looks particularly alluring, including at present, when investors are complaining that bonds and emerging markets are both experiencing bubble-like inflows.

However, given the dilemmas involved, some managers prefer not to make big calls on the market and heavily overweight or underweight it compared with the index.

Rob Burdett, a co-head of multi-manager at Thames River Capital, the F&C subsidiary, tries to find Japan managers who can deliver consistent outperformance relative to their index, rather than making big calls on whether Japan will outperform globally.

The problem is that some of the best performing managers base their stock picks and fund management on macro calls about where the country is heading. Chris Taylor, for instance, who manages the Neptune Japan Opportunities fund, has said Japan’s multinationals look much healthier than the domestic economy, which is likely to continue its downward spiral.

He says the best way of making money in the long term is by buying big Japanese exporters and hedging to benefit from a weakening in the Japanese currency, which makes exporters’ goods more competitive and overseas earnings more lucrative.

However, as Burdett points out, there are short-term risks to this approach. In particular, the strengthening of the yen made Japanese markets outperform in 2008 and 2010 in foreign currency terms, despite weakness in stocks in 2008 in particular. Second, Taylor’s high-conviction approach means he can outperform strongly in one year and underperform strongly the next, as happened in 2009 and 2010.

In the country that has flattered to deceive for two decades, forecasting such scenarios has proved notoriously difficult.