After a very weak first quarter, things are looking up for the Japanese market, according to Miyuki Kashima, head of Japanese equities at BNY Mellon Japan. Meanwhile, investors focused on more positive newsflow such as the government’s plan to lower corporate tax and the possibility that the Government Pension Investment Fund (GPIF) may increase its allocation to Japanese equities.
“Investor attention gradually shifted away from the concern over volatility in the economic numbers caused by the consumption-tax rise in April,” says Kashima. “Foreign investors and trust banks, which represent domestic institutional investors, turned net buyers of the market, while individual investors sold. Although the updated revitalisation plan contained very few surprises, it did remind investors that the government remains committed to pushing Japan back on a growth path,” she adds.
Stock specific challenges
Amid this backdrop, the BNY Mellon Japan All Cap Equity Fund had its fair share of struggles during the second quarter of 2014. Sector selection was positive, but stock selection was negative. Notable detractors from performance included Yokogawa Electric, manufacturer of industrial automation and control equipment Hikari Tsushin, a mobile-telecommunication service subscription agency which have now expanded its product range to office equipment.
Contributors to performance included Nihon Koden which develops and manufactures medical testing equipment and patient monitoring systems, bearing producer NSK and Temp Holdings which provides temporary staffing services as well as full-time recruitment services.
“We initiated some new positions during the quarter, but the overall turnover however, was quite subdued at less than 5% which is at the low end of our range. On average the strategy’s annual turnover is in the range of 30- 50% per annum. At the end of the quarter, the portfolio held 75 stocks. New positions in the portfolio include UACJ, a manufacturer of aluminium products, cosmetics company POLA Orbis, and private brand retailer Ryohin Keikaku whos product line includes clothing food and household items.
The team added to existing holdings such as Penta-Ocean Construction, auto parts maker Nifco, and house maker Sumitomo Forestry. We sold out of holdings such as Rakuten, the internet retailer, camera and semi-conductor equipment maker Nikon and Mitsubishi Gas Chemical.
Reforms bedding in
While reforms carried through by officials in Japan are settling in, Kashima says the longer term prospects for the country look brighter. She says: “The most attractive aspect of the Japanese market is the prospect for a sustained longer term recovery. Japan’s nominal GDP peaked in 1997 and declined through to 2012. In this environment, companies curtailed capital expenditure of all kinds, including investing in people. As a result, the loan-to-deposit ratio of the banking industry has fallen from about 100% 20 years ago to only 60% last year, reflecting a vicious cycle of deflation and negative business sentiment.
“The current government and the Bank of Japan have expressed their determination to end deflation. Once deflation ends and economic activity such as investing and borrowing normalises, the resulting positive multiplier effect could and should support the economy over an extended time horizon,” Kashima adds.
This article was provided by BNY Mellon Investment Management and does not necessarily reflect the views of Citywire