While Japanese equities have been a choice investment this year – the Nikkei this week soared past 14,000 for the first time in five years – Harker, manager of GLG’s Core Alpha strategy, remains adamant that the authorities have taken the wrong approach in dealing with the country’s debt problem.true
He said: “Public debt in Japan has been going up and up and it needs to be addressed. You can do this in a number of ways; the honest way is to reduce spending and raise taxation, but what the Government has done is raise spending and hopefully use monetary policy to erode the real value of the debt. It is theft being dressed up as benevolence, and it’s dishonest and it will end in tears.
“Japan has an enormous public debt burden and it can’t get rid of it. It is stealing money from people in order to make the problem go away, but it won’t be able to do it. It is disgraceful."
Ultra-loose stance
Under Prime Minister Shinzo Abe, the Bank of Japan has adopted a stance of ultra-loose monetary policy. It said last month that it would increase its purchase of government bonds by ¥50trn (£320bn) per year, which has been greeted positively by its equity markets. The Yen, however, has continued to weaken – a boon for exporters.
“I think QE will come to be seen as a complete and utter disaster and Japan’s latest decision to throw caution to the wind is a disaster in the making,” added Harker.
“All markets have been distorted – bond yields have been distorted, short-term interest rates have been distorted; everything has been distorted and it is all going to come apart in our hands at some point. Equity markets have been completely and utterly rigged for six years – because the authorities are so dominant in financial markets, they’ve completely skewed normal cyclical relationships.”
Harker remains steadfast with his process of investing in large-cap value stocks, an approach which has yielded strong results this year, despite a largely poor 2012 when small-cap growth outperformed. His current overweights are to financials and consumer electronics.
Vicious outperformance
“Normally small caps do well globally when you have growth and confidence, while large caps tend to be places of safety and we think the need for safety will be paramount at some point in the future,” he explained.
“We’ve just come out of a period that has only happened three times in 30 years and what we are hoping for is if this trend is established you can expect a period of vicious outperformance followed by a trend improvement. If the market can deliver that to us, we will significantly outperform our competition.”
A full interview with Harker features in the May edition of Portfolio Adviser, out now.
