Tony Lanning, portfolio manager of JP Morgan Asset Management’s Fusion range, says that while the latest bout of QE is certainly welcomed, it is just additional oil to the already-spinning wheel.
He said: “The fact that the BoJ has come out again and done a second iteration of QE is kind of a bonus, but the way that we’ve positioned our portfolio and the manager principally that we own (the Polar Capital Japan Fund) I think we can make good money whether there is quantitative easing or not.
“Most people had given up on Japan – it’s been such a lousy place to invest that, understandably, people didn’t have any allocation or, if they did, it was underweight. Then Abenomics was announced and QE was put in place, and you had a lot of momentum investors getting involved; not because they really believed in or cared about what was happening in Japan, but because they’ve just seen how effective it [QE] has been in the US and they want some of it.”
Lanning has long been overweight in Japan, with his Growth Plus fund currently having a 17.5% allocation there.
“In the first quarter of this year when Japanese equities were in excess of 10% [of the portfolio] we were actually buying more,” he said. “Of the overall equity allocation we have in our portfolios, the proportion that is Japanese is the highest it’s been. It’s our biggest overweight position.
“Our view is that this is much more than a QE story. This isn’t just a story for next year or the next two quarters – this could be a three-business cycle event. If Japan does begin to get some momentum of its own, the macro hedge funds that were short Japan, the global funds that were underweight Japan, they will start to get more involved again.”
But why is this bout of quantitative easing different to ones in the past?
“It [QE] has happened a lot sooner than people thought,” Lanning said. “I think people thought that there would be another bout of QE but that a second consumption tax would go through first and the Bank of Japan would keep QE in their armoury to use if they needed to. The fact that they’ve come out and done it now shows just how much conviction there is to making this happen.”
Harwood Capital’s CIO Richard Philbin is also a firm advocate for Japan’s capacity for sustainable long-term growth, and that the policy change will bolster the economic recovery.
“You’ve got the Bank of Japan government pension investment fund (GPIF), which has historically always had a low allocation to equities. It used to have a 12% allocation to domestic stocks and is now at 25%. A huge majority [of the GPIF] is domestic assets,” he said.
“Not only is there a huge demand through quantitative easing, there is a huge demand in relation to the amount [of equities] that are going to be purchased.”
Philbin also believes that despite Japan’s economy being on a downward trajectory for over 20 years, this could be a pivotal moment.
“It’s an economy that has done so badly it’s very lowly-correlated to other markets,” he said. “But you’ve got a great diversifier there. We’ve also got a scenario where PE valuation looks very attractive – there’s a whole series of tailwinds that are going to be very productive and positive for it.
“It’s a situation where deflation has been going on for so long that people are saying why buy today when you can buy cheaper tomorrow. If that changes to an inflationary environment it means people will buy and it will kick-start the economy. To go from a deflationary environment to 2% inflationary target, that is huge. It really is a big deal for that economy, and you’ve got to remember that Japan is the second-largest economy in the world. The opportunity is set to turn things around.”
However, while both Lanning and Philbin are positive on the outlook for Japan, there are several risks to keep in mind.
“Things could change if we began to see companies backtracking on things that they’ve begun,” Lanning warned. “For example, if the GPIF turned around and said ‘we’re not going to buy any more equities’ even though they’ve got the ability to buy up to $250bn (£157.5bn) worth of equities over the next three years. They’ve announced that they’re going to buy another 12.5% of equity – that equates to about what foreign investors put into the market last year. It’s a big deal.”
The yen also has a history of being a safe haven currency, something that Lanning and Philbin are wary of.
“One thing we’ve got be mindful of is the currency,” said Philbin. “I wouldn’t have Japanese yen investments, I’d have dollar or sterling.”
“If the yen became a safe haven currency again, I think that would be enough to derail the short-term momentum in Japanese equities,” Lanning added. “A lot of people are going in for the QE and devaluation of the yen story. If they suddenly saw the yen go from 114 back to 100 they’d go ‘that’s really bad news for the Japanese stock market, I’m out of here’.”
And while at the moment it seems like an outside punt, Lanning believes that Japan would feel the tremors if US growth hit a bump.
“If the US economy were to slow down dramatically, that’s the biggest risk,” he said. “I struggle to see how even Japan could decouple from the US economy completely. If we did begin to feel that the US economy wasn’t growing as quickly as we thought it was, that would be a warning bell.”
