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Fund firms see potential value in Japan equities

But during the three-year period, only around 38% of Japan equity funds have outperformed the MSCI Japan Index.

After a dismal 2018, Japanese equities rebounded this year. In US dollar terms, the MSCI Japan Index has returned 18.57% year-to-date compared to -12.58% for the full-year 2018.

Fund groups have become positive on the asset class, citing, among other things, relatively healthy corporate balance sheets, an easing of the US-China trade dispute and perhaps most importantly, attractive valuations.

Dan Carter, fund manager at Jupiter Asset Management, writing in a client note, pointed out that inexpensive Japanese stocks represent unrealised potential. “The price-earnings multiple on the market has been consistently below that of the US and Europe for the past half-decade.”

Carter added that Japan’s equity market is changing and expects more companies to be listed in the next few years.

“Investors should be aware of the entirely new businesses which are queuing up to list in Japan. These businesses inject much-needed vibrancy into the Japanese equity market in sharp contrast to its staid image. Great investment opportunities are likely to be found in this new crop of potential unicorns.”

Other firms have also highlighted the earnings potential of Japanese companies. For example, Matthews Asia expects that earnings growth will be at 7.5% in 2020, while UBP highlighted that earnings for Japanese companies have been 50% higher than US and Europe for the last five-to-six years.

Investor sentiment has also been buoyed by the government’s ¥26trn ($240bn) fiscal stimulus plan, launched this month.

Intended to unfold over three years it aims to “spark consumer spending, by promoting cashless payments as well as spending on public works to bolster infrastructure in the wake of the recent string of natural disasters”, according to the Japan Times.

Natixis, in its Asia outlook 2020 report, said the package will also support R&D on post-5G technology, healthcare and driving technology for senior citizens.

“These new initiatives are anticipated to support growth from early 2020,” the report said.

Japan funds struggle vs index

Actively-managed Japan equity funds have performed well this year. Out of the 39 actively managed SFC-registered Japan equity products, 21 or 53% of them outperformed the MSCI Japan Index.

Longer-term, however, only 15 or 38% outperformed the benchmark on a three-year period.

The First State Japan Equity Fund has been the top performer (62.4%) during the three-year period. On the flipside, the Invesco Japanese Equity Core Fund (4.2%) was the worst performer during the same period.

Japan equity funds – top and bottom three vs benchmark and category average

Source: FE Fundinfo. In US dollars. The MSCI Japan is for reference only and may not be the benchmark for the funds.


Part of the Mark Allen Group.