The Japanese market rallied after it became clear the new government would unleash a massive quantitative easing programme, but suffered a dramatic fall of 15 per cent a month ago.
Many investors have taken profits and shifted out of Japan, but Fisher says that the market’s growth story, particularly in drastically undervalued and under-researched small and mid cap stocks, is just beginning.
"Japan is a market that will be extremely important and interesting for Asian investors over the next few years," he said.
Performance of indices over 1yr
Source: FE Analytics
"This is the time to be increasing your Japanese exposure, not to be concerned about government reforms."
"If you look at the data from the last two or three months, the Japanese have started to consume: we have seen increases in spending, wages and bonuses."
Fisher explains that large brokers and institutional investors closed their Japanese research departments and stopped covering the market during its long period of underperformance.
This is now changing, and market coverage is increasing, which will lead to increasing interest in small and mid cap stocks, as well as price rises.
"Eighty-five per cent of Japanese stocks I look at do not even have a broker. That’s starting to change, and there’s an increase in research in the mid cap sector that will lead to increases in valuations eventually."
"Valuations remain extremely cheap in certain cases."
The manager adds that strong data suggesting a recovery in the Japanese domestic economy has been overlooked in the rush to take profits and react to the macro.
The index-buying that went on was biased towards the larger companies in the market, meaning that companies in the small and mid cap sectors are still good value.
"The second point is that the rally in Japan from last November was driven by the macro factors, specifically by the Bank of Japan policy and the weaker yen," he said. "There was a lot of index futures-related buying."
"Now that has unravelled in the last few months or so, the next wave will be driven by factors in corporate earnings."
"Over the last couple of quarters they have tended to exceed expectations, and that process will continue over the next couple of quarters."
"We are likely to see better numbers reported by many of the companies I am researching."
Fisher’s analysis is broadly in line with that of Charles Stanley Direct’s Rob Morgan and Bestinvest’s Jason Hollands, who outlined their thinking to FE Trustnet last month.
The analysts picked two UK-domiciled funds that focus on under-researched mid-sized and smaller Japanese companies, which they thought were ripe to benefit from the wave of interest in the country: JOHCM Japan and CF Morant Wright Nippon Yield.
Fisher’s own fund is Luxembourg-domiciled. It launched late last year with the aim of using a non-benchmark approach to find under-researched and undervalued small and mid cap stocks in Asia.
Data from FE Analytics shows it has made 21.87 per cent since launch while the MSCI AC Asia index is up just 8.27 per cent.
Performance of fund vs index since launch
Source: FE Analytics
The manager explains that his value discipline leads him to avoid many of the sectors and areas that most Asian funds concentrate on.
He warns that the popular consumer-growth story has attracted a lot of investor attention, meaning that many of the stocks that play this theme are highly valued.
"There’s been a huge divergence of performance across Asia over the last 12 months or so, and there remains an enormous variance of valuation both across different countries and even within them."
"There’s a certain valuation level to some of the larger cap, well-known index names (consumer-oriented stocks in particular)."
"Valuations have been pushed up by the popularity of these themes, but there are unloved and unglamorous stocks in the markets trading on 4x to 5x earnings."
The manager holds nothing in Thailand and nothing in the Philippines, despite them being among the top-performing markets in recent years.
He explains that the high valuations make them extremely volatile when markets sell off, as they did last month.
"Two of the markets that suffered the most – Thailand and the Philippines – were markets where you got exponential growth in the last few years, which has driven up the valuations in those two markets, making it difficult to value them: I do not own a single stock in Thailand."
"They are very popular in Asian funds, but when you see markets go risk-off (in this case because of fears of US interest rate rises), they are the most volatile and are held by those types of investors who then rush for the exit."
The manager prefers to hold stocks in Vietnam and Malaysia, which he explains are better protected in down-markets thanks to their lower valuations.
Both markets have outperformed the broader Asian one in the market fall of the last month, according to data from FE Analytics.
Performance of indices over 1 month
Source: FE Analytics
"Those were two markets that have been out of favour for various reasons, so actually they did not suffer so badly, because you do not see this type of selling."
"Plus, we have seen some relatively good news of late. In Vietnam, a new government is endeavouring to accelerate rate cuts and encourage FDI [foreign direct investment]."
"In Malaysia, the election result turned out not to be a negative surprise, which led to domestic pension funds coming back into the market."
"The right multiples offer a margin of safety. The same thing is true of a select number of Malaysian businesses. There’s a big contrast with the large consumer-facing stocks on the index."
The Chinese market is another on low valuations compared with history, but Fisher says there are reasons to be wary of investing now.
"The continued underperformance of the Chinese market has meant that a number of those businesses are appearing more frequently on my screens and I have added six stocks to my watch-list over the past couple of months, so valuation is making this market interesting."
"However, it remains a very difficult environment for those small to mid cap businesses, because at the same time as structural improvement with regard to rebalancing the economy, there is increasing competition from foreign companies coming into China and Chinese companies themselves."
"Higher wages are cutting into these companies' competitive positions."
"I continue to prefer to invest outside China where there’s more transparency and valuations are a little cheaper, but where I can still find companies that are benefiting from Chinese growth."
