Japan will deliver value under Abenomics, says Martin Currie

Japan’s stimulus package could lift the country out of its 20-plus-year economic slump, according to John-Paul Temperley, investment director, Japan, at Martin Currie Investment Management

As the G-8 summit in Northern Ireland began with a focus on Syria, the elephant in the room remains the impact of Abenomics, the ambitious stimulus programme initiated by Japanese prime minister Shinzo Abe. There is no sign hedge funds are deserting the ‘Abe trade’.

One hedge fund manager, John-Paul Temperley, investment director, Japan, at Martin Currie Investment Management, remains upbeat on the prospect of the country. “We had actually been positive prior to [the introduction of Abenomics] mainly for a more cyclical reason, with an earnings recovery driven by a positive financial sector cycle taking hold,” says Temperley.

“The Abe policy initiatives since last November are helpful to that. We have seen a lot of positive flow into the market and with that comes additional volatility. But I think the long-term picture remains attractive,” he adds.

Martin Currie runs a series of Japan-focused funds, focusing on bottom-up stock-picking. Temperley believes his portfolios can benefit as the Japanese stockmarket moves higher. “We typically play it through individual company positions rather than taking a futures and options approach,” he says. “Ultimately the market fundamentally remains cheap and earning momentum remains cheap.”

He says institutional money is waiting for an opportunity in the market. “Corrections we have seen ultimately provide an opportunity for people to come into the market.”

Martin Currie launched its first Japan fund in 1989. Temperley joined the asset manager in 1998. He is now co-manager of Martin Currie’s Japanese long/short strategy and the long-only Japan Alpha Fund. Like other fund managers at the company, Temperley is also an analyst covering Japanese banks, real estate and auto sectors. Before joining Martin Currie, Temperley worked on SBC Warburg’s Japanese equities desks in Tokyo and London.

Temperley is particularly positive on the financial cycle with long positions in the real estate and banking sectors. He notes that financial stocks have done well since the market turned in mid-November 2012. “What we have been typically doing is recycling some profits on the long side into what I would call real earnings,” says Temperley.

He also says some of the financial sectors have been moving “more on hope and expectation. I think long term that hope will be proved right. But for the market to keep moving higher, it’s natural to expect some rotation from areas that have gone up more to some laggard areas.”

For Temperley this translates into favouring some of the stocks in the industrial machinery area, which have not fully reflected his view of the weakening of the yen. “We like some of the material names in Japan where they have a strong market share in a particular area and would benefit again from the competitive advantage a weaker currency gives them as well as the strong top-line growth that they were already seeing. There are a number of areas that I think still offer good opportunities. Our mantra right now is that typically Japanese companies could be approaching record profits in this coming 12-month period, surpassing the average peak of the record level in 2007.”

Over the 12-month period, Temperley expects to see profit recovery and generation while share prices move higher. “When the market moves quickly and with velocity, there are always going to be bull market corrections and recently that has come to pass. That is actually a healthy thing,” he says, adding, “But you need fundamental earnings driven reasons for people to keep buying into the market and fortunately I think we have those conditions now.”

Writing in his latest newsletter to investors, Temperley says the Japanese market could deliver 50%-plus earnings per share growth in this fiscal year and trades on a mid-teens profits/earnings ratio. The abrupt market moves at the end of May, however, have led to a reappraisal although he remains optimistic on the outlook.

“A rise in Japanese yields is to be expected if inflation returns to the system and we will likely hear more from Mr Abe on deregulation ahead of July’s upper house election,” he says in the letter. “Tactically we have cut our net exposure. Experience shows that spikes in volatility can take some time to be digested by the market. However, we still believe the Japanese market will achieve attractive earnings growth in the year to March 2014 and valuations are supportive.”

 

This article was first published on Risk

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