Last year saw Abenomics take hold and turn Japan into the land of the rising economy with 2014 looking like a continued hot prospect for investors in the region.
Several who had faith in Prime Minister Shinzo Abe and his three arrows will have reaped the benefits in 2013, with hopes that the country’s progress – much needed after the oft-talked about lost decades and its fallout – will continue.
According to a recent survey of fund managers across the continent carried out by Portfolio Adviser sister publication Expert Investor Europe in conjunction with Skandia, sentiment towards the country was at its highest level ever last month.
Granted last year was a bullish one and anyone who bet on Japanese equities will have been very satisfied indeed. The Topix has returned 82% over the last 15 months, and while talks of false dawns have been bandied around (five rallies of around 40% have taken place in the last 20 years), the structural reforms that Abe has put in place seem to have created a sense of widespread confidence, with the third arrow of nominal wage rises hotly anticipated.
Buyside at odds with sellers
However, the buyside tells a different story.
According to in-house research over the last few months, Portfolio Adviser and Expert Investor Europe have both witnessed an at-best neutral stance over Japan, at worst slightly negative.
European fund buyers from across the continent were neutral over changes to their forward-looking Japan allocation in 2012, (60% saying they would likely keep it the same, rather than increase or decrease), with an almost-net positive vs negative sentiment on the year.
In 2013, the ‘likely to remain the same’ was down to 35%, while with a slight upturn and slight downturn (1% in each direction) but, perhaps more telling were the 24% of respondents who claimed to not use Japanese equities at all. Granted this response option was not available in 2012, and may well have been captured in the 'neutral' block.
Turning to the UK, Tom Becket, chief investment officer at PSigma Investment Management – a long-standing bull on Japan, warned towards the end of last year that it might be a case of being too painful not to have exposure.
More recently he noted that his once lonely status as a Japan bull was becoming increasingly crowded. He noted the stronger yen and said he was watching the forthcoming GDR data with keen interest.
While Japan has often been a value or growth story, there are those who have suggested that 2014 might be time for income to come into favour in what feels like a highly optimistic environment to call the end of two lost decades.
Morningstar OBSR senior portfolio manager Cyrique Bourbon told sister title recently: “As things stand, the Japanese economy is set to grow well above-trend rates at least through 2015, despite the upcoming major fiscal contraction via a consumption tax rise.
“The fact that the recovery is based on the most comprehensive and unified economic policy changes Japan has experienced in several decades leads up to believe it is materially more likely to be sustained than past ‘false starts’.
Why the ambivalence to Japan?
UK fund buyers indicated to Portfolio Adviser towards the end of 2013 that they would be largely retaining their allocations to Japan – almost 50% – while 39% would be increasing and 8% would decrease. Just 5% said they did not use the asset class at all.
While mere snapshots of the perception of the asset class, the sentiment is at clear odds between what buyers want and what sellers are flogging – or trying to.
It may be a case of awaiting a bit more evidence of the third arrow before people will really begin to vote with their assets, but it certainly seems like the worst is over for the region.
If valuations remain in control, the future looks very bright as Japan’s sun continues to rise.
