Mark Dampier: Japan's earthquake just delayed the power and banking-led recovery

The Analyst

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The Independent Online

Investment is not a lot different to the fashion industry sometimes. Just as clothes go in and out of fashion so do investment themes and styles.

When I came into the investment industry Japan was all the rage. Few investors would have thought of having less than a 20 per cent allocation. Since its peak in 1989 the market has experienced a long, and not always slow, decline.

Emerging markets suffered a similar, albeit shorter, fate between 1994 and 2001. Today they are in vogue, and one would be hard-pressed to find a portfolio without some exposure to emerging markets.

Japan is different. Many investors have very low exposure, if any. Even after its stock market has risen almost 40 per cent in local currency terms most investors remain uninterested. Numerous false dawns in the past and a lack of faith in this rally are partly to blame.

I recently caught up with Stephen Harker, co-manager of the GLG Japan CoreAlpha fund. He believes the rally is sustainable, noting that during April most industry sectors contributed to stock market gains. He has not seen this since 1985. The amount of shares being traded has exploded, up over 100 per cent on the previous year. Despite recent gains Mr Harker still believes valuations are attractive.

Smaller companies and growth stocks have made the best gains so far this year. This hasn't suited Mr Harker's bias towards large and medium-sized value stocks. The fund has not participated in the rally to the same extent as some peers. Nevertheless, he remains focused on identifying undervalued companies that have fallen out of favour with investors.

His contrarian nature often steers him towards loss-making companies which have underperformed for long periods. He seeks those he believes remain fundamentally sound and capable of turning around, but such an approach can lead to periods of lacklustre performance.

The fund has extremely low turnover, which I view as a positive.

Mr Harker has purchased two new investments this year and sold three, which he describes as "hyperactive". The fund will always be fully invested as he does not believe investors are paying him to hold cash. This approach requires a lot of discipline as it means that before a new stock can be bought at least one must be sold.

Presently, banks represent the largest overweight position by sector. Mr Harker believed they had bottomed in 2011, but the earthquake and tsunami in March of that year delayed their recovery. The stock market rally that began in the second half of 2012 was led by financials, and he believes that, unlike in the UK, Japan's banks have been fully cleansed and should continue to benefit from QE. Almost 20 per cent of the portfolio is invested in banks.

Around a further 20 per cent is invested in electrical appliance companies, an area which should benefit from a weaker yen, which makes Japanese exports cheaper for foreign buyers. Sony was his biggest holding until he recently took profits after a run of strong performance. The company has its share of problems, including competition from the likes of Apple and Samsung, but he believes the balance sheet is strong and the company has the potential to recover.

An interesting shift taking place in Japan is the switching back on of nuclear power following the earthquake and tsunami. Two nuclear reactors out of 50 are running again and Shinzo Abe, the Prime Minister, is working towards getting more up and running in due course. This will reduce the huge gas import bill, providing a benefit to the wider economy as well as companies that own and operate nuclear power stations. Mr Harker has added Kansai Electric Power to the portfolio in response.

Short-term performance has been disappointing, but Stephen Harker is an experienced fund manager with an exceptional long-term track record. For investors who believe the recovery in the Japanese stock market can continue, I believe this fund is worthy of consideration as part of a diversified portfolio.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit

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