Heartwood took a decision to overweight Japanese equities in Q4 of 2014, partly in order to capture changes at the micro level; and the firm still maintains this view, explained investment director Michael Stanes.
Despite a disappointing macro climate including the longer-term structural challenges of ageing demographics and a shrinking working age population, it has not stopped change from happening at the micro level, according to Stanes.
And those micro changes tell a different story of a “new” Japan. They includes improving shareholder value within corporate Japan, mainly through strengthening corporate governance. “Though the share price performance of large-cap export-orientated companies has been pressured in the last few months by yen strength, other sectors and stocks exposed to a ‘new’ Japan have told a very different story, particularly among smaller companies,” said Stanes. The Tokyo Stock Exchange Mother’s Index has been rising since mid-February, he noted.
“Investors are tapping those companies that are able to exploit and benefit from structural societal shifts occurring in Japan – an ageing population and changing consumer lifestyles — and which can potentially create long-term value,” explained Stanes. Examples of such industries include medical diagnostics, robotics and consumer digital.
However, Stanes points out that as sterling-based investors, the firm is also very conscious of currency implications. “We initially invested partly on a hedged basis, taking the view that the yen would depreciate in response to Bank of Japan stimulus. We then successfully removed the hedge in July 2015 and this has proved to be the right decision, since which time the yen has strengthened against sterling by more than 15%,” he explained.
The yen could be nearing a turning point in Stanes view, but he has urged investors in Japanese equities to take into account both equities and currency in order to get the most out of their investment. With this in mind, Heartwood believes it is prudent to now partially re-hedge some of its Japanese equity exposure, he said.
