Write off Japan at your peril
Record low interest rates could prove attractive
WHILE CHINA WAS all the rage in 2010 there’s growing support for its forgotten Asian cousin Japan. United States and Japanese stocks have been out of favour over the past few years as the so-called emerging markets and BRIC – Brazil, Russia, India and China – have taken centre stage and attracted high levels of inflows into their equity markets, which has pushed up the average price of equities while developed companies operating in developed markets have been largely ignored.
China recently raised its lending rates in an attempt to cool high levels of borrowing that’s driving rampant growth in the region, and market experts believe at least another two increases are on the cards this year. By contrast, the US and Japan are trading at record low rates as they try to encourage spending and borrowing to stimulate their economies.
Goldman Sachs has tipped the Nikkei to deliver more than 20% in its top trades for 2011, pointing out it will be a natural beneficiary of the improved industrial cycle. The firm noted: “We expect a pickup in GDP growth in the advanced economies through the year and even more clearly into 2012, led by the US but visible also in Canada, Britain and Japan.”
In a recent note to clients, Adrian Clayton – CEO of PSG Alphen Asset Management – was also extolling the virtues of investing in Japan. Clayton noted Japan boasts very high levels of technological sophistication, with its services sector accounting for 75% of GDP. It’s one of the leading nations in scientific research, with 700 000 researchers making use of the third largest research and development budgets – $130bn – in the world, plus being the world leader in fundamental scientific research. It’s also the world leader in robotics and of the Forbes Global 2000 list, representing the world’s largest companies, Japan contributes 326.
But the problem with the Japanese story is that the Nikkei is now trading at a quarter of the value it traded at in 1989 and has largely gone sideways for the past 20 years. With an average dividend yield of 2%, that hasn’t been particularly attractive to investors by any measure.
There are very few pure Japanese plays South African investors can use to gain exposure to the region, with the Deutsche Bank Japanese X-Tracker being front of mind. This exchange-traded fund, which investors are able to participate in from as little as R300/month, gives access to the MSCI Japan index, which contains around 400 listed Japanese businesses. The drawback of the X-Tracker is that it’s a rand price tool that’s been negatively impacted by the appreciating rand, something that’s hurt the product since listing.
While most of the other major asset managers offer general Asian funds, Stanlib does have its offshore Japan Fund, which it launched in 1997 and investors can participate in it from $2 500. Over the past five years the fund has lost around 48%, with an annual management charge of 1,3% plus an upfront fee of a maximum of 5,5% thrown into the mix. It’s important to consider these fees when taking a view on the Nikkei, as an investor would need significant outperformance to make up these charges.
Japan may have been a burial ground for investors over the past two decades but there are signs interest in the region is again perking up and if you believe the industrial economy is now starting to tick up, then now might be the time to acquire exposure to the region.
ADRIAN CLAYTON Tech savvy