The Bank of Japan delved further into positive interest rate territory last night (30 July), hiking to 0.25% after ending the era of negative rates in March.
The decision, which was voted on by a majority of 7-2, sees rates in Japan move to their highest level since the global financial crisis in 2008.
Speaking ahead of the decision, Man GLG Japan Core Alpha co-manager Emily Badger (pictured) told Portfolio Adviser that the end of negative interest rates has led to a more positive outlook for banks and financials sector.
“It’s a sector that we’ve had big exposure to over the years,” Badger says. “As a value fund and as contrarians, it continues to be an area of interest for us, partly because of the end to negative interest rates. The banks will be direct beneficiaries of that.”
For Badger, another positive development is governance-related. Alongside corporate governance reforms, Japan’s regulator has increased pressure on companies to reduce their cross-shareholdings.
Historically, it has been common for Japan’s largest companies to take stakes in each other, for various reasons including protection from hostile takeovers and maximising control over corporate decisions.
“For some of the financial institutions, they do still have significant cross-shareholdings. It is generally more difficult for the financial institutions than other sectors to unwind these.
“But what we saw with the non-life insurers in Japan and the scandals that they had — they’ve been pushed by the Financial Services Agency to sell down those cross-shareholdings, and we think that pressure will probably spread out to other financial companies.
“There’s the end of negative interest rates, but also the movement into an inflationary environment in Japan. There is a need for Japanese households to move the current 50% of their wealth that they have in cash and deposits into assets. We think that that would be positive for the brokers, for example, as well as the direct beneficiaries being the banks.”
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The £2.3bn Man GLG Core Alpha fund, which Badger co-manages alongside lead manager Jeff Atherton, Adrian Edwards, and Stephen Harget, has delivered top-quartile returns compared to the IA Japan sector over three and five years.
According to FE fundinfo data, the strategy has a 23.2% weighting to banks and financials, with names such as Mizuho Financial Group and Sumitomo Mitsui Trust among its top 10 holdings.
Looking ahead, Badger remains positive on the overall outlook for Japan.
“Japan has always been a macro market. For the last 12-to-18 months, the market has been performing based on domestic-related factors. There’s the [corporate governance story] with the TSE, the Bank of Japan, but we always need to be conscious of what’s happening in the rest of the world, which obviously has an impact on the yen and on the market itself.”
“Generally, for the long-term story for Japan, we do remain optimistic. First, because of the underlying changes within corporate management and the mindset.
“Something to note is that we’re seeing younger managers coming in, in Japan, who did not experience the bubble in the same way, and they think in a different and more global manner, which we’re quite encouraged by.
“The second reason is that the era of deflation is over. We think that the divergence and the narrow breadth of the market has opened up contrarian opportunities for us as value investors.”
BoJ decision
The BoJ’s unanticipated decision to increase rates to 0.25%, while also halving its monthly bond purchases, has been viewed by industry commentators as a move to strengthen the yen.
Reacting to the BoJ’s decision, Lindsay James, investment strategist at Quilter Investors, said: “This unexpected rise in interest rates from the traditionally cautious BoJ has seen the yen strengthen and the equity market rise, an unconventional response to an unconventional situation where in recent weeks, persistent currency weakness has deterred international investors.
“With the Federal Reserve likely to be cutting rates at the September meeting, the differential between US and Japanese policy rates will narrow further, but ultimately remains wide.
“However, the risk is increasing that currency moves could begin to dominate investment opportunities, with the dollar-yen unwinding potentially a further headwind for US equities.”
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