Unicorn: undervalued Japanese stocks offer above average returns

Unicorn Asset Management’s Peter Walls has increased his exposure to Japan as he believes Japanese stocks have now become undervalued after a year of turbulence.

Walls doubled his £15 million Mastertrust fund’s (Unicorn Mastertrust A Income) weighting in Japan in the first quarter from 4-8% by buying into the Perpetual Japanese and Baillie Gifford Shin Nippon investment trusts. He believes this was too early in the year however as prices are only now starting to look undervalued.

He said: ‘I did it a bit too early. Most of corporate Japan got a bit carried away earlier this year because the domestic economy was picking up and some events pushed up earnings forecasts higher than you would expect.

‘In 2006 the market sold off aggressively and only now are we getting to the point where we are expecting increased demand.’

These higher levels of demand are coming from China, which has overtaken the US as the biggest market for Japanese products, and that demand is only just beginning to filter through into the Japanese economy, Walls said:

‘Having been burnt on the upside, the economy is now the exact opposite, too pessimistic, which can represent value. If you lose some money on the currency now, the loss is just delayed until the currency rebounds.’

The fund has returned 16.4% over the past year to the end of June in comparison to the IMA Active Managed sector’s 15%, ignoring the effects of initial charges with gross income reinvested at the payment date.