Many of the nation’s biggest companies are cyclical, so the large influx of investment into the region naturally gravitated towards those names. These businesses are by their very nature prone to sensitivity, however.
Industrial and consumer discretionary are the two biggest sectors in the MSCI Japan index, representing 40.8% of the overall market. It is this dominance that has led the high returns in Japan to concentrate in areas such as sea transportation, mining, insurance and banking, up 277%, 200%, 125% and 120%, respectively, over the past three years.
See also: JPM’s Elliott: Are bigger investment trusts always better?
“These companies are resilient, but ultimately, they’re also very cyclical,” Brett says. “They’ve had a great period of earnings in recent times given the challenges coming from the Russian invasion of Ukraine and its effect on energy prices, but when we look at the long term, are those earnings going to be sustainable? We’re not sure they are. What we’ve been doing instead in the portfolio is buying more classic growth stocks.”
Brett’s investment strategy centres on growth stocks, which has been challenging amid a market rally led by value companies. His trust is up 5.4% over the past two years while the Topix benchmark index has soared 26.5%. Yet with all this renewed sentiment from international investors, Brett and his colleague Thomas Patchett expect cyclicals to recede and growth companies to take centre stage once again.
Read the rest of this article in the October issue of Portfolio Adviser magazine
