The Analyst: Japan is looking like an interesting bet

I have to cast my mind back to 1987 to recall a sustained period of stock market volatility similar to the spell in recent weeks. Rises and falls of 1 per cent, 2 per cent or 3 per cent a day are seemingly a matter of course, along with a few bigger ones of close to 5 per cent sprinkled in. Hardly a helpful environment for long-term investors already frightened of committing funds to the markets. A possible solution is to drip-feed money into areas you think offer value on the poorer days, though even this can be tricky psychologically.

One region that has virtually become a no-go area for private investors is Japan. It is perfectly understandable. Since the heydays of the 1980s, Japan's stock market has been an exceptionally poor performer, although the considerable strength of the yen, up more than 80 per cent in the past 20 years against sterling, has mitigated the losses experienced by overseas investors. There have been so many false dawns on Japan over the years that investors are rightly sceptical, but a recent meeting with Stephen Harker of GLG Japan CoreAlpha Fund highlighted to me that Japan is now very, very cheap.

Mr Harker believes the market is already incredibly oversold. He notes the Japanese stock market has been the worst performing developed-world stock market in every downturn since 1988 – with the exception of the most recent one. Despite the global credit crisis rumbling on and the challenges created by the tragic tsunami in March, the Topix index is down only 9 per cent since the start of the year in yen terms. Perhaps this resilience means it really has reached rock bottom?

Stephen Harker has had a poor year to date in terms of performance. The real action has been in smaller company stocks with exposure to the BRIC economies, but he believes this cycle is now coming to an end and conditions are set to be more favourable for his fund, which invests in the largest Japanese stocks. Always a great contrarian, Mr Harker disagrees with the consensus view that Japan should benefit from its proximity to China. While bearish on China anyway, he believes China is "eating Japan's lunch", gradually taking market share from Japan's manufacturing sector. He argues an economic downturn in China will actually benefit Japan as it will mean lower commodity (especially copper) prices, which should boost Japanese company profitability.

Among Japanese stocks he be-lieves financials are especially cheap. Having been through a deleveraging process over many years there is little sign of economic distress, and Japanese banks have already been outperforming those in other global markets. Interestingly, retailers are also having a good run with consumer confidence seemingly growing.

This is not to say that Mr Harker is bullish about the global economic outlook. He is not, but he does believe Japan is poised to outperform. It went through its own credit crisis some years ago and most investors have given up on the market having had their fingers burnt, so valuations are exceptionally undemanding. Japan's public debt pile is often cited as a catastrophe waiting to happen, but Mr Harker believes it can be overcome. Japan effectively owes itself money, with the debt principally owned by domestic investors who may, in Mr Harker's view, have to take a haircut on it at some stage.

As usual the yen is the wildcard for overseas investors in Japan. Mr Harker's view is that the yen may weaken slightly, and this will be beneficial to Japanese companies whose exports would become more competitive. It is important to note, however, that many Japanese multinationals gave up on their domestic economy years ago and have operations all round the world. They are truly global businesses not reliant on Japan itself. It is unusual for Mr Harker to suffer underperformance for three quarters in a row and I note another fund manager, Paul Chesson of Invesco Perpetual, has had a similarly difficult time. If you are a contrarian investor, gradually allocating some money into Japan looks like an interesting bet right now, and this fund is a high-quality choice.



M ark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Sport
England's women celebrate after their 3rd place play-off win against Germany
Women's World CupFara Williams converts penalty to secure victory and bronze medals
Arts and Entertainment
Ricardo by Edward Sutcliffe, 2014
artPortraits of LA cricketers from notorious suburb go on display
News
newsHillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate
    Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

    'The economic collapse has happened. What is at risk now is democracy...'

    If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
    The science of swearing: What lies behind the use of four-letter words?

    The science of swearing

    What lies behind the use of four-letter words?
    The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

    The Real Stories of Migrant Britain

    Clive fled from Zimbabwe - now it won’t have him back
    Africa on the menu: Three foodie friends want to popularise dishes from the continent

    Africa on the menu

    Three foodie friends want to popularise dishes from the hot new continent
    Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

    Who will fill Donna Karan's boots?

    The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
    10 best statement lightbulbs

    10 best statement lightbulbs

    Dare to bare with some out-of-the-ordinary illumination
    Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

    Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

    Briton pumped up for dream meeting with world No 1
    Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

    Nick Bollettieri's Wimbledon Files

    It's time for big John Isner to produce the goods to go with his thumping serve
    Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

    Dustin Brown

    Who is the German player that knocked Nadal out of Wimbeldon 2015?
    Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

    Damien Martyn: 'England are fired up again, just like in 2005...'

    Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test