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Japanese market soars on further stimulus news

At a time when the US is on the cusp of exiting the ‘Quantitative Easing’ programme it put in place to support its economy after financial crisis, UK investors have been left guessing over when the Bank of England will raise interest rates, the Bank of Japan has just gone in the opposite direction.

Jason Hollands Jason Hollands
31 October 2014

This week it took the markets by surprise, hitting the accelerator pedal on its own stimulus programme, announcing that it will hike annual monetary expansion to Y80 trillion through the purchase of Japanese government bonds. It will also increase its purchases of Exchange Traded Funds and real estate securities.

This news has sent the Japanese market rocketing, with the Topix Index up 4.3%  in a single session. There could be more to come as expectations are mounting that Japan’s biggest public pension fund will increase its allocation to domestic equities.

The sheer scale of Japan’s stimulus programme over the last couple of years relative to the size of the economy is enormous, making the Bank of England’s past forays into QE look like the equivalent of a vicar’s tea-party compared to a rave. But such boldness is not without considerable risks for the country’s balance sheet.

However in the near term these extremely accommodative measures provide significant support to Japanese equities and show a determination by the Bank of Japan to meet their 2% inflation target, so for now this should lift sentiment towards the Asia giant.

For many years Japan has been shunned by investors, but over the last couple of years policies aimed at making a decisive break with the past have made Japan look one of the most interesting developed markets, certainly meriting a reassessment. As one of the world’s largest developed economies and home to some world class companies in sectors such as technology, consumer goods and automobiles, we believe Japan deserves an allocation in a diversified portfolio.

Given the potential impact of aggressive expansion of the monetary basis on the yen, investors considering investing might look at those Japanese equity funds with share classes that hedge the currency exposure back into sterling.

There are three such funds which hold strong ratings from our research team:

GLG Japan CoreAlpha Equity I H GBP – this is the sterling hedged version of veteran manager Stephen Harker’s popular fund. Harker is a contrarian investor who focuses on large-cap stocks that he believes are undervalued. Harker argues that current case for Japan is firmly anchored around the valuation opportunities, less so as a growth story. Bold views mean this fund will deviate very significantly from the index.

Schroder Tokyo z GBP GH – we regard this fund, managed by Japanese speaker Andrew Rose, as a 'core' Japanese equity fund, predominantly invested in large  and mid-cap names. The focus is high quality, solid growth companies. This is the sterling hedged share class.

JO Hambro CM Japan BH GBP – this is a sterling hedged version of Scott McGlashan’s multi-cap Japanese equity fund which has 28% weighting to smaller companies and 53% to mid-caps. The style is pragmatic, with both growth stocks held and undervalued companies where McGlashan sees a catalyst for a re-rating. Scott earned considerable kudos with intermediaries while at Invesco Perpetual, famously telling advisers to sell his fund ahead of the Nikkei nose-diving.