My positive recommendation of Japan-investing funds last year has proved disastrous in the short term.
Over the past year you could have made more money in almost every other type of fund. But I still believe the investment will pay off. It had better, because a big chunk of my pension fund is invested in Japan.
Fortunately, I think there are good reasons to expect a turnaround soon followed by a period of strong growth. And, with one of our selected funds still showing a return of over 150% over five years, it’s not a meltdown situation.
See our Japanese fund recommendations here
Japanese Smaller Companies have been hit hardest
Over the past year, the average fund investing in Japan lost over 5%, while funds investing in the UK and Europe made average gains of 14% and 16% respectively. Our own selected Japan funds have done worse, with losses over the past year of up to 38%, because they are gung-ho growth funds investing in mainly smaller companies, the area of the market that has taken the biggest hit.
So let’s start with the negatives: why has Japan been such a miserable investment over the past year? Here are the three biggest factors:
-The Yen has got weaker and weaker - it declined in value by about 10% last year against sterling.
-Japan’s exports are good - Japan had a trade surplus last year of 3.7% of GDP - but domestic economy is slow, with retail sales down a little in the past few months.
-A high proportion of Japanese shares are owned by foreigners, who were sellers throughout most of 2006
See our Best Buy Japan fund recommendations
A little pain now could lead to a considerable gain later
But as usual in financial markets, each of these factors also has a positive side. The Yen is now hugely undervalued on almost any measure, and is depressed only because speculators continue to sell Yen and buy other currencies (interest rates in Japan are only 1%, so it’s easy to earn more elsewhere).
Investment managers Societe Generale are among those who expect this trend to reverse during 2007; they think that the rise in the Yen could be surprisingly quick. Last week the Bank of Japan raised interest rates from 0.25% to 0.5% - which you might call a token gesture, but it signals the start of a squeeze on Yen speculation.
Japan’s exports remain strong despite the China factor, which is a great positive for the economy as a whole. The reason that hasn’t benefited the domestic economy is that profits are at an all-time record, while wages have remained static.
See our Japanese fund recommendations here
Japan’s government is actually promoting higher wages
Believe it or not, the government has been putting the arm on business to try to get companies to raise wages (imagine that happening in Britain)! Actually, the market will probably do the job: unemployment is at an eight-year low of 4% and there are now more jobs available than jobseekers.
Twenty years ago, Mom and Pop Japan used to have about 15% of their overall wealth invested in shares. Today it’s under 7%. Shares are unfashionable. And when there was deflation, all you had to do was keep money in the bank.
Now that inflation is back (OK, it will only be about 0.5% this year, but it’s still inflation) investors will need to look to shares to protect their capital. With hundreds of billions of pounds sitting in low-earning bank deposits, it won’t take many Mom and Pop purchases to give the market an upward shove.
Our Best Buy Japan fund recommendations
Data to 22/2/07. Source: Trustnet.
The top fund managers believe there are big growth prospects
Investment managers are getting a bit more optimistic after a gloomy 2006. Anja Balfour at AXA Framlington has most of the fund’s cash in medium-sized or larger companies (AXA Framlington have a separate Japan smaller companies fund), but she has moved some money recently into smaller businesses because this is where she sees the best value.
This backs up the opinions of David Mitchinson at JP Morgan and Hideo Shiozumi at Legg Mason that ‘new economy’ businesses offer by far the best growth prospects, and that the gentle progress of the economy (GDP growth is expected at 1.8-2% in 2007) gives them plenty of scope.
It’s worth remembering that it was during the years of recession that the Japanese bought enough mobile phones to make theirs the most profitable market in the world for not just the makers of phones but sellers of games and ringtone downloads.
See our Best Buy Japan fund recommendations
Both residential and commercial property are bubbling
Right now, the property market is red-hot, with residential property in Tokyo having doubled in under two years and commercial construction booming.
Our selected funds have done far worse than the market index over the past year. But over the longer term, each of these funds has beaten the average of their rivals’ performance and I am confident that 2007 will see them showing a strong recovery.
Europe was the big success story for investors in 2006, but I think it will be Japan that brings home the bacon this year.
See our Japanese fund recommendations here
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
