Premier’s Jennings: Be cautious – buy Japan


Recent news of the Federal Reserve’s ’tapering’ sent bond yields sharply higher and subsequently caused many other asset classes to fall, mainly on profit taking.

This was the headline-grabbing news in the press in June but in my opinion is not the big news in the market today. The Fed have in fact just given us a clear and concise calendar of when they expect to reduce and ultimately end quantitative easing, and indeed when they will start to raise the Fed funds rate. As if that was not enough, they have also told us precisely what conditions of GDP growth and unemployment they are assuming and that they will be pragmatic if these prove to be incorrect. What more could we ask?

The big news, which carries significant uncertainty as I write, is the decision of the Chinese government and central bank to squeeze their shadow banking industry and, in the process, dampen speculation in the property market.

Having spiked on 20 June, the interbank lending rate has significantly calmed down, but the issue has not gone away in my view. With the current government having been in place since March, it would seem to be trying to put structural reforms in the economy into place to create greater stability in Chinese growth for the coming years.

Whilst this is laudable, whenever government policy tries to change the direction of an economy (not least, one the size of China’s) the risk of policy error rises substantially. In bringing these activities back into line, we simply do not know what the ramifications will be to lending, infrastructure investment and, ultimately, consumer confidence and growth.

What we do know is that risk has risen and some economists and strategists are even talking about Chinese GDP growth falling to below 6 per cent in 2014. For an economy generating over 40 per cent of total global GDP growth (Economist, Q2 2012), such a slowdown would have great ramifications across global stock markets and in many sectors.

So as a global equity investor, what should I do? One interesting region is Japan. I can hardly claim to be early in highlighting Japan when the stock market rose 76 per cent in the six months to its recent peak in May this year. The US and Chinese news does, however, re-enforce the attractions of Japan.

QE elsewhere has shown us that this tends to weaken a currency. With its doubling ($1.3trn) of the monetary base before the end of 2014, Japan has just begun to embark on a massive stimulus and, to have a chance of getting inflation near its 2 per cent target by then, the yen needs to weaken further.

With the Fed now openly talking about removing stimulus and ultimately increasing official rates, the interest rate differential has widened sharply with Japan, again increasing the likelihood of a weak yen. In terms of China, slowing growth might have detrimental ramifications to the global stock market. A hedge against this therefore would suggest buying one of the least correlated global stock markets – Japan.

In looking for stocks, I am mindful of an environment of improving US growth and (maybe) an improvement in Japanese domestic growth. Many companies are beneficiaries of a weak yen but the more interesting ideas are where there is a major transactional benefit (i.e. where a Japanese manufacturer can simultaneously increase profitability and take market share from foreign competitors).

An example of this recently bought in our global equity funds, is the world’s leading tyre manufacturer, Bridgestone, whose two largest competitors are Michelin (French) and Goodyear (US), yet whose largest geographical market is the US. A little acceleration in growth, a weaker yen and further weakness in input costs (mainly rubber) will provide further upgrades and a strong impetus for this, and other Japanese names, in times of greater uncertainty elsewhere.

Mike Jennings is chief investment officer at Premier Asset Management and manager of the Premier Global Strategic Growth fund