Playing safe in case the tide turns

Panellists take a bearish stance on Japan but maintain some exposure in anticipation of an economic turnaround. In addition, some small companies and big names hold value and promise.

Cockerill holds the Morant Wright and GLG vehicles, both of which he describes as doing things differently. “Stephen Harker [manager of the GLG fund] would argue Japan has been through the financial crisis the West is facing. The banking sector has seen huge changes and huge consolidation. This could be what will unfold in the West. His argument is Japanese banks are on a much better footing than many of their western counterparts.”

“Currency is a big influencing factor,” says Cockerill. “It remains a tricky one to assess. Japan has some global leading industries. The big stuff put high quality products into the marketplace; Sony, Canon, the car companies. A pick-up in sales should go through to the bottom line. There’s also the domestic market story, which the Morant Wright fund is playing. These companies are cheap, but again, predicting whether they will perform and when is much harder. We’re long-term holders of that fund and it is done well, but in the short term Japan will tread its own merry course.”

Shodo Maeda, the head of Japanese equities at Schroders, notes that while the announcements on QE and the asset purchase fund in Japan did not have an immediate meaningful impact on the currency, they should ease pressure on the yen. “These measures are broadly positive for the market as a whole, and probably most positive for sectors such as real estate, housebuilders and highly leveraged companies.”

Guy Boden, the lead analyst at S&P Fund Services, highlights in S&P’s latest Japan sector report that managers investing in the area say the strengthening yen is seen as less important than economic recovery. Reits are still viewed as offering great value, he adds, but managers have concerns on rights issues and corporate governance. All managers see valuations in Japan as strong relative to other markets. However, there are still questions about when that value will be realised.

Cockerill points out that Japan has some other concerns; its demographics are not positive, for example. But he feels there are also risks in not having a weighting to the region. “It’s an expensive country in a low-cost region. China has become a major trading partner, so the fortunes of China will be felt in Japan. All things being equal, because we are benchmarked we have a weighting. By and large we have been fairly neutral. We have looked at small companies, which when they perform, perform extremely well. The story is they look fantastic value but we haven’t seen the returns yet. Japan, when it goes, will surprise everybody. In a sense there’s a risk in not being there. The run could be fairly significant. Given the way we operate, that’s where we are. Does it translate into returns for investors? Logic says it should, but reality says it hasn’t done yet.”