The Nikkei 225 has risen almost 5.5 per cent since Tuesday, adding to the already impressive gains that it’s made during the recent global equity rally. According to FE data, the index is up 24.11 per cent over the last six months, easily outstripping major indices in the UK, US and Europe.
Performance of indices over 6months
Source: FE Analytics
More aggressive monetary policy from the new Japanese government has been the principle driver of the rally. Japan has been in a “deflationary spiral” for getting on for two decades now, but talk of further quantitative easing has made for a weaker yen.
This was confirmed earlier today, immediately sending the yen down relative to the dollar, and sending the Nikkei to past 13,000 points – a level not seen since 2008.
Japanese fund managers have inevitably been the biggest beneficiaries of the rally – the IMA Japan and Japanese Smaller Companies sectors are up per cent over the six month period, respectively.
The Legg Mason Japan Equity portfolio has led the way in the IMA Japan sector, with returns of 47.86 per cent, while BlackRock Global Funds Japan Mid & Small Cap Opportunities leads in the IMA Japanese Smaller Companies sector, with 38.94 per cent.
Performance of funds and sectors over 6months
Source: FE Analytics
It hasn’t only been Japanese managers that have benefited from the recent rally though; a number of high profile fund managers have been quoted on FE Trustnet as being big proponents of the region, and have been rewarded handsomely as a result.
Funds with high exposure to Japan
| Name | Japan exposure (%) |
|---|---|
| Aberdeen Asset Managers - Aberdeen All Asia IT PLC TR in GB | 22 |
| Ruffer LLP - Ruffer Investment Company TR in GB | 22 |
| Aberdeen - Asia Pacific & Japan A Acc TR in GB | 21 |
| CF Ruffer - Total Return O Inc TR in GB | 19 |
| Investec - Global Special Situations A Acc GBP in GB | 16.1 |
| Invesco Perp - Global Smaller Companies Acc in GB | 13.64 |
| First State - Worldwide Equity A Acc in GB | 13.3 |
| Jupiter - Global Managed Inc TR in GB | 11.16 |
| Lindsell Train Ltd - Lindsell Train IT plc TR in GB | 10.8 |
FE Alpha Managers Hugh Young (pictured), Steve Russell, John Chatfeild-Roberts and Nick Train are all overweight Japan, and high profile names such as Alistair Mundy and Jonathan Asante also have a major weighting to the region. Mundy recently told FE Trustnet that Japan was one of the few areas that he currently sees value.
All but three of the funds on the list have underperformed their sector average over six months, and all have outperformed over three months. Industry experts have welcomed the Bank of Japan’s announcement, adding fuel to arguments that a genuine revival in the Japanese market is on the cards.
June-Yon Kim, manager of the FF FAST Japan fund, said: “New Bank of Japan governor Kuroda was able to deliver even more aggressive easing than the most optimistic expectations.”
“With this backdrop, we are likely to see further weakening in the yen, which will be supportive of continued positive earnings revisions.”
“Although market sentiment appears frothy and a short term pull back would be unsurprising, the tailwind for the Japanese market has definitely strengthened overnight.”
“The market will eagerly await announcements in regard to structural reform – prime minister Abe’s so called “Third Arrow” – in the coming months, which will likely be a key determinant of returns in the second half of fiscal 2013.”
“I would continue to focus on potential reflation beneficiaries in the financials space and structurally competitive exporters,” he added.
Alex Treves, head of Japanese equities at Fidelity, is also optimistic, but warns investors against complacency:
“The actions are undeniably exciting and will continue to generate much comment as markets watch to see how the repercussions play out. Beyond the positive implications for certain asset prices, a general shift to inflationary expectations in Japan could have a wide-reaching effect.”
“However the possibility of a return to domestic inflation, and the boost to competitiveness and returns for many companies due to the weaker yen should not distract investors from some key longer term questions.”
“Domestic reflation will be a much more powerful and sustainable story if it is accompanied by reform, and by a broad-based improvement in returns which are shared with equity investors,” he added.
Hargreaves Lansdown’s Adrian Lowcock says the policy announcement has taken even the biggest Japanese optimists by surprise.
“The governor announced an increase in QE to $50bn of bonds each month – double current levels and much more than expected,” he said. “That’s more than the US, for an economy which is much smaller.”
“The Bank of Japan has also changed what it is buying. It will be buying longer-dated government bonds to bring down long-term interest rates.”
“It will also increase its purchases of even riskier assets such as exchange-traded funds and real estate investment trusts. So it won’t just be using QE to buy government bonds. It’s also printing money to buy equities, albeit in relatively small amounts.”
“The initial reaction of the Japanese market says it all, reversing a fall to a 2 per cent rise. Stock markets tend to respond positively to more QE as it should drive risky asset prices, such as shares, up.”
“With this round of QE targeting riskier assets it is likely to be good news for the Japanese stock market.
Lowcock recommends Stephen Harker’s GLG Japan Core Alpha fund for investors who are equally optimistic about the Japanese economy.
“Harker has an exemplary record going back some 30 years, and we continue to believe this fund offers exposure to shares from the cheaper end of a cheap market,” he said.
“At current levels there could be an outstanding long-term opportunity.”