Japan charms European investors despite growth fears; “Japan remains an under-analysed and under-appreciated market, with a lot more improvement going on in governance, capital efficiency and shareholder returns than most casual investo r

June 1, 2014 6:18 am

Japan charms European investors despite growth fears

By Madison Marriage

Enthusiasm for Japan-focused funds in Europe has not abated, despite fears that Prime Minister Shinzo Abe’s economic reforms have begun to run out of steam.

European investors placed €3.1bn in Japan-focused funds in the first three months of the year, according to figures from Cerulli Associates, the research firm.

This followed a bumper year for Japan fund managers in 2013, during which European investors allocated €13.6bn to the asset class – a sharp reversal on the €2.1bn of outflows suffered in 2012.

The continued flow of money into Japan-focused strategies from Europe comes in spite of concern that Mr Abe’s economic policies have not gone far enough, with the Tokyo Stock Exchange down nearly 10 per cent year to date.

The so-called Abenomics, which initially focused on fiscal stimulus and monetary easing, prompted powerful gains of 59 per cent in the Nikkei 225 last year. Further announcements on structural reforms are expected this summer.

Torgeir Hoien, portfolio manager of Skagen Tellus, a global bond fund, pointed out that the purchasing managers’ indices for Japanese manufacturing and services crashed in April.

“This might be a sign that Abenomics is running out of steam,” said Mr Hoien, who currently has zero Japanese exposure in his portfolio versus 30 per cent for the benchmark.

Valentijn van Nieuwenhuijzen, head of the multi-asset boutique at ING Investment Management, also voiced doubts about Japan’s potential for further growth.

He said: “Labour market participation and flexibility need to be addressed and domestic product markets need to be liberalised. On this front Abe has talked the talk, but not yet walked the walk.

“He still has to deliver on structural reform, and the details of his actions will determine if the Japanese equity market can move into a multiple-year bull-market.”

However, Cerulli believes that there is scope for European investors to increase allocations to the asset class even more, given that they have just €61bn invested in Japan funds. US investors, by contrast, have €587bn invested in the asset class.

“[Asset managers] may want to make a stronger case in selling Japan’s potential,” the research firm said.

Other fund managers are more optimistic about Japan’s growth prospects.

Howard Smith, head of Japan research at Indus Capital Advisors, said: “Japan remains an under-analysed and under-appreciated market, with a lot more improvement going on in governance, capital efficiency and shareholder returns than most casual investors realise.”

Ben Williams, the investment director at GAM responsible for the Swiss group’s Japan funds, agreed: “Valuations are cheap, earnings momentum is good and we are seeing a notable change in management attitude, all of which reinforces our belief that things are finally changing in Japan for the better.”