Professional investors are becoming increasingly optimistic about prospects for Japan and Japanese companies, with a net 91% of Japanese fund managers saying that Japan’s economy will strengthen, according to results from the latest BofA Merrill Lynch survey of fund managers.
We are finally seeing an improvement in sentiment and asset allocation for Japan, says Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research.
For the last two months, fund managers have generally shunned Japan and Japanese companies, according to the survey results. But now optimism has hit record-high levels and growth prospects for the country are improving, says Baker. Despite this, many investors are still generally underweight Japanese investments, he says.
Baker explains that renewed optimism for Japan’s economy, and other developed economies, was sparked after investors calmed down about Greece’s debt problems. Once Greece announced it had restructured its sovereign debt, investors immediately started becoming more bullish and expecting improved global economic growth. This led them to consider investing in Japan, a country that benefits from improving demand in developed markets, said Baker.
The BofA Merrill Lynch survey shows growth prospects in Europe, the US and Japan are now overshadowing emerging markets, where some investors are turning bearish.
Japan-Focused Funds
One popular Bronze-rated fund investors may want to consider to gain access to the Japanese market is the Invesco Perpetual Japan fund, says Morningstar consultant Brook Sweeney. “There are few funds that are in the Japanese sector that outperform over the longer term, and this is one of them.” However, Sweeney warns that volatility within the portfolio can be high and returns are often lumpy.
Another option is the Silver-rated Baillie Gifford Japan Trust (BGFD), which has been managed by Sarah Whitley since 1991. Whitley's fund focuses on investing in medium-sized growth-focused companies in low growth areas that are often overlooked by other investors. Two of the fund's largest holdings are Itochu Corporation (ITOCY) and Japan Tobacco (JAT).
After a difficult 2011, where Japan suffered from a crippling tsunami, a strengthening currency and difficulties with flooding in Thailand, Whitley says 2012 should be much more normal.
Valuations for Japanese companies are worth looking at right now, since the country as a whole has been ignored by investors for so long. “The market remains very lowly valued. It’s an 'anti-bubble'. Valuations are very depressed,” she says. “There’s a huge discount for Japanese companies and we don’t think that is justified.”
However, some investors may be concerned if the Japanese currency devalues, which could affect their investments. Whitley says that shouldn't be a problem. “When you look at currency weakness, historically you make more in the stocks than you lose in the currency,” she says.
The money manager survey by BofA Merrill Lynch compiled responses from 278 institutional investors who manage nearly $800 billion in combined assets. The survey was conducted between March 9 to 15, 2012. To read about other results from the survey, take a look at "The Most and Least Loved Sectors".
