Emma Wall: Hello and welcome to the Morningstar Series, 'Why Should I Invest with You'. I'm Emma Wall and here with me today is Andrew Rose, Manager of the Schroder Tokyo Fund.
Hello Andrew.
Andrew Rose: Morning.
Wall: So quite a lot has changed in Japan over the last six months and the last year. I thought we could start with the good news. Why should people be excited?
Rose: Well there has been a lot of good news in the market and Japan's almost had what it could have wished for really over the last three or four months. I'll give you some examples. Back in October you had the second round of QE, so that injected some liquidity into the economy. That was pretty quickly followed by an election which Mr Abe won hands down really. So that encouraged confidence that Abenomics will continue.
Then moving into 2015, you've had this halving of the oil price, which is actually very positive for the Japanese economy. And after that you've had some encouraging signs in terms of corporate governance improvements. Now, we're just beginning to see signs that the domestic economy is going to recovery, so there has been indications that wage awards will be more generous this year than last year. So a lot of good news has been thrown at the economy as I said.
Wall: And positive economic news doesn't always translate to a bullish stock market, but that has been the case for Japan, hasn't it? The stock market itself has done incredibly well and it hasn't been diluted by a falling currency.
Rose: That's true. I mean first time, in the long-time, I can sit there and say that Japan is at its best point market year-to-date, be it yen, sterling or dollars in fact. So I mean some of the good news is economic, but some of it's also company specific. So I talk about corporate governance, but also you've had a good environment for corporate profits and benefits from the weak oil price and from the yen.
Wall: And haven't there been some changes in the pension system which means you've seen money go into the stock market which has helped it to rally?
Rose: Yeah, that's another positive change I suppose in the sense that historically a strong market, historically, but certainly over the last two or three years, a strong market was associated with foreign buying. This time around, foreigners are big net sellers, but the markets gone up and as you say, that's addictive of what some of the public pension funds have been doing.
They have been very bond-centric, becoming less so, moving more to risk-assets such as equities and so that supply and demand dynamic has been an another boost for the stock market.
Wall: And you have mentioned year-to-date Japanese stock market is the best performing. Will this continue?
Rose: Only two months.
Wall: But, will this continue, that was the question, because it has been a volatile stock market in the past.
Rose: It certainly has. I think the omens are pretty good. They are not 100% good, but they are certainly are quite encouraging. I mean the economic backdrop is more positive. The problem last year was economic disappointment, it now looks this year as it will see economic surprises in particularly I'd focus on the benefits of falling oil price.
And also the benefit from a likely pick-up in real incomes; last year real incomes were negative. So, economic backdrop is good policy backdrop is encouraging. I talked about the flows. I think that's encouraging and also company-specific news I think is also good.
I mean there are risks out there, certainly concerns about the yen, will the Bank of Japan move again and risk with undermining the currency. In my view, Japan's had enough currency weakness, doesn't need more yen weakness, so I think that needs watching. And also I think geopolitical issues that relate to Japan need watching as well.
Wall: And what are those geopolitical issues?
Rose: Well, obviously international ones, but the ones that are Japan-specific are to do with whether Mr Abe maintains his economic focus. He is at heart a nationalist and has various constitutional ambitions. And that's fine, except that it can be quite antagonistic towards Chinese and Korean neighbours. And so far he's tread on the whole quite carefully, but that may not always be the case.
Wall: And here’s hoping he gets the balance right.
Rose: Indeed and this is important year, because it's a 70th anniversary of the ending of Second World War. And every 10 years the Prime Minister makes a statement and so be all eyes on what sort of statement he makes in August.
Wall: Andrew, thank you very much.
Rose: Not at all, a pleasure.
Wall: This is Emma wall for Morningstar. Thank you for watching.
