A democratic political system, sophisticated education system and the potential to benefit from Asian growth improves Japan’s investment outlook, it is claimed

Written by Ray Clancy

Thursday, 17 June 2010 10:12

Japan currently easily eclipses China and emerging markets in general as an attractive investment opportunity according to the first in a new series of bi-monthly reports from Ignis Asset Management.

The company’s Multi-manager Snapshot report, designed as a first port of call for up to date commentary and analysis on themes affecting the multi-management and wider asset management space, points out that emerging markets such as China have certain well rehearsed characteristics which have attracted large amounts of capital chasing growth.

But Simon Mungall, head of multi-manager at Ignis, believes that over the long term, while GDP in these countries will continue to grow strongly, there are very substantial risks to their equity markets that have so far been underestimated.

‘For example, like the rest of the world’s major economies, China embarked on a huge stimulus package in 2009. Around $500 billion was pumped into the economy, much of which found its way into infrastructure spending. China now has the same number of bridges as the US, despite having only a fifth of the number of rivers. This infrastructure spend supported commodity markets, including commodity-related currencies such as the Australian dollar and Brazilian real,’ he says in the report.

‘The fact that the Chinese economy is controlled by a one-party state government means that latent problems may take longer to emerge than they might in more open, transparent markets. Our preference is for those markets that exhibit the potential to achieve a less
superficial form of GDP growth,’ he explains.

‘Japan, which has lagged most other major equity markets over previous years, constitutes a large portion of our equity exposure. Japan is poised to benefit from Asian growth, with 55% of exports going to Asia, but importantly, it has a sophisticated education system and a democratic political infrastructure,’ he explains further.

‘It is a proven leader in high-technology markets and could provide many of the
industrial innovations that global capitalism will need to survive in the face of the various challenges it faces. At a time when we are generally cautious over equities, we find Japanese valuations to be very supportive, limiting the downside in bearish markets,’ says Mungall.

‘China, on the other hand, has further to fall if markets lose risk appetite again. We have positions in three Japanese funds, all run by managers with specialisation in a different part of the market. For large cap, we use GLG Core Alpha Equity, For mid cap, we use Schroder Japan Alpha Plus, and for small cap, we use Melchior Japanese Opportunities,
which is managed by a Japanese fund manager. In small cap, we believe it is particularly important to have local specialist knowledge and to be able to regularly attend company meetings,’ he adds.