Write off Ja­pan at your peril

Record low in­ter­est rates could prove at­trac­tive

Finweek English Edition - - MONEYCLINIC - MARC ASH­TON marca@fin­media24.com

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.


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