Many managers have held on to their Japanese equities and remain optimistic on the country’s long-term outlook. But they diverge on the opportunities ahead and when those will surface.
Scott McGlashan and Ruth Nash, managers of the JO Hambro Capital Management Japan Fund – rated AA by S&P – says Japan’s investment case is drawn from the world’s awareness of its importance to the global supply chain.
Companies are also valued cheaply, they say, with price-to-book ratios of less than 1, the cheapest levels seen for 40 years. They are finding quality companies on 0.5-0.6 times the book value, they say.
As far as JO Hambro’s global team is concerned, the arguments made by McGlashan and Nash are so strong that they have now gone overweight on Japan – by 2%.
But while many of the bullish managers draw their views from a belief that Japan’s recovery will happen in line with global recovery, one of the two sceptics, Ashburton’s Jonathan Schiessl thinks the problem lies.
With the second round of quantitative easing in the US due to draw to a close, ongoing problems in peripheral Europe, uncertainty stemming from upheaval in the Middle East and the threat of Chinese inflation, it is unlikely global recovery will be swift, he says.
Schiessl, one of the lead investment managers for Ashburton’s Japan and Chindia Equity Funds, runs those mandates from a Jersey base. But he has good contacts and knows the situation on the ground, says Boden at S&P.
For him, in spite of attractive company valuations, a major headwind is the continued sale of stock by domestic investors.
To stave off the risks, the Japanese will have to become net buyers, he says.
But Albert Abehsera at IFDC, an asset manager that has specialised in Japanese investment since 1984, sees the lack of domestic demand being supplanted by foreign buyers.
Trust banks will stop selling Japanese equities following reallocation of pension funds, meaning foreign net buying will drive the market higher in the absence of sellers, he says.
The other sceptic, Hannah Cunliffe, who manages the UniJapan Fund for Union Investments out of Frankfurt, thinks Japan has a fundamental competitiveness problem that runs deeper than any short-term impact from the quake.
In her view, compelling individual stock valuations are not enough to outweigh its overall need for a re-rating.
Japan’s industry has lost its way, Cunliffe thinks, with production shifting to North Korea, Taiwan and China over the longer term.
She cites the most famous and popular electronic brands today, saying they are Korean – for instance, Samsung.
Meanwhile, former Japanese giants such as Sharp and Panasonic are falling away, she says.
Comparing Japan with the UK, which has become predominantly a service economy that still invents, she believes it is destined to outsource.
For Japanese car manufacturers, there are one or two parts they cannot make, so those firms will be forced to look outside the country, she says.
But Beazley thinks Japan’s capacity to innovate should not be underestimated. “The Japanese understand what it is to rebuild and to challenge old ways of thinking.”
A sign that the optimists cannot all be wrong, in spite of the risks, is shown in the reviewed S&P ratings of the Japan funds.
Of 28 funds invested in the country, six were classed as AAA, 13 as AA, and eight A.Only one, the BlackRock Global Funds Japan Value Fund, had its rating withdrawn.
Why? Because one of its managers left, not because of a reduced outlook for Japan itself.