Japan veteran predicts election boost

Scott McGlashan has shifted his JOHCM Japan fund towards domestic-focused companies, on the basis that a change in government at the general election next week could bring a boost to household spending.

Data released on Monday showed that Japan had returned to growth in the second quarter after a year of contraction, and McGlashan predicts at least modest growth to persist.

But he argued that domestic-focused companies were likely to perform better than those primarily involved in the export market.

McGlashan has shifted exposure from a neutral position to around two-thirds of the fund in domestic-focused companies in recent weeks.

Export-focused companies have led the market rally in Japan since March, and McGlashan argued that smaller companies now represented better value.

He predicts a victory next Saturday for the opposition Democratic Party of Japan (DJP), and argues that a number of their policies could favour domestic-facing companies.

‘One of the things they campaigned on was that they would cut needless government capital expenditure and return money to the household consumer,’ he said.

‘If the DJP carries out the reforms, we might see a pick-up in consumer expenditure in 2010.’

The DJP’s stance on the yen could also have an effect, he said. While the ruling Liberal Democratic Party has favoured a weak yen to boost exports, the DJP prefers a stronger yen for its impact on imported consumer goods.

Government stimulus spending is likely to dry up if the DJP comes to power, but McGlashan believes this would have only a muted effect.

‘There is a lot of evidence that for every extra amount the government spends, the private sector cuts back the same amount.’

A stronger threat to growth in domestic consumer appetite will come, however, in resistance to an incoming DJP’s plans, he argued.