Mark Dampier: Your each-way bet on Japan as experts back opposite outcomes

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The Independent Online

Everyone has an opinion on the economy and politics. They differ of course and it's interesting to compare and contrast conflicting opinions – even if it doesn't make my job any easier.

For instance, there is currently no shortage of views on the Japanese stock market and Chris Taylor, manager of the Neptune Japan Opportunities fund, and Paul Chesson of the Invesco Perpetual Japan fund, both renowned managers within the sector, have decidedly opposing outlooks.

Mr Taylor expects a further 40 per cent fall in the yen and therefore feels it's important to hedge his fund's currency exposure. To benefit from a weaker currency, he has tilted the portfolio towards large, well-financed, industry-dominating, multinational exporters. Should his view prove correct, their goods will appear cheaper to the rest of the world, making them more attractive and boosting sales.

Around 85 per cent of the fund is invested in companies such as Toyota, which generate most of their earnings overseas. The other 15 per cent is invested in defence, civil engineering and building materials companies that could benefit from government spending. Conversely, he is currently avoiding the utility, financial and consumer sectors, which are dependent on domestic demand.

Mr Taylor is an unabashed bull, confident the Japanese stock market will pull through, with large, multinational exporters to the fore. In contrast, Mr Chesson is currently bearish on the outlook for the Japanese market and doesn't expect the yen to weaken any further. While he feels Japan is undervalued and should perform well relative to cash and other global markets, he is positioning the fund defensively.

Earnings forecasts for many Japanese companies still look attractive compared with other markets round the world, but Mr Chesson feels they are likely to remain flat, at best. He expects wide-spread dividend cuts and particularly lacks confidence in the ability of economically sensitive companies to maintain their payouts. He has greater faith in high-quality defensive companies but feels that they are currently overvalued.

Over the past six to nine months, Mr Chesson has tilted the portfolio towards domestic companies, which he feels should be less affected by a weakening global economy. This is a repeat of his approach through 2006-2007 – a stance that helped the fund hold up better than its peers during the Japanese stock market fall. He has been increasing exposure to tobacco, consumer services and food companies, although he has struggled to find undervalued stocks in the latter two areas. Elsewhere, he has decreased exposure to technology from 10 per cent this time last year, to 5 per cent.

New additions to the portfolio include Tokio Marine Holdings, an insurance company. The manager believed the company was trading at an attractive share price, given its sustainable growth, high profitability and quality management. He has also recently initiated a position in Chubu Electric Power. Japanese power companies generally still have weak balance sheets and their yields are depressed. But nuclear power plants are gradually being switched back on and Chubu has returned to profitability. The manager also feels the company has the potential for growth as it plans to expand in the Tokyo area.

Elsewhere, he has added to a position in Gulliver International, a second-hand car dealer and domestically focused company whose new showrooms are helping to drive robust earnings growth, in Mr Chesson's view.

Each manager has a very different outlook and has positioned his fund accordingly. Invesco Perpetual Japan would benefit from a strengthening yen and weak global growth, whereas Mr Taylor's Neptune Japan Opportunities is positioned in expectation of the reverse.

It's impossible to predict which fund will come out on top in the short term. But on the basis that a portfolio should have contrasting styles and views, there is an argument for holding both. This would diversify your Japanese exposure and should provide lower overall volatility, along with the best chance of making money over the long term.

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