What is the underlying strategy of the Fund?
The Neptune Japan Opportunities Fund is primarily focused on Japan’s industry-dominant multinationals, including well-known companies such as Toyota. These are companies that now have much of their production facilities – and indeed generate most of their sales – outside of Japan, and are therefore relatively insulated from the domestic economy. They are also beneficiaries of a weak yen, as the revenues they earn overseas are worth more in yen terms when they are bought back into Japan if the currency devalues.
This point is key, as the Fund has had a currency hedge in place on the portfolio since April 2009. This was implemented due to the extensive research we undertook on the government’s fiscal situation which we believe was, and still is, unsustainable. In our opinion, the only way in which the government can close the fiscal deficit is via higher corporate taxes. Much of the existing tax take in Japan is already paid by the large multinationals, and therefore the only way they can sustainably increase this going forward in our opinion, is through a weaker yen boosting the value of their overseas profits.
Elsewhere in Japan, we also believe that Abenomics is progressing and that this will lead to a return to inflation in Japan. This should benefit financial and property companies as assets such as residences and office buildings increase in value. Therefore we also have some exposure here.
How is the Abenomics program in Japan progressing?
We believe Abenomics will eventually rejuvenate Japan’s domestic economy, through a weaker yen, higher profits and sustained wage growth. However, market consensus is that Prime Minster Abe and the Bank of Japan (BoJ) seem to have lost their way somewhat of late. Confidence in the economy will only come as a result of having consistently rising profit levels. If profits rise year-on-year and companies are confident that this will continue, they can pay higher wages and invest back into their business. Likewise, consumers have to be confident that their wages will continue to rise before they are willing to spend their money and reignite the domestic economy. We believe Abe and the BoJ needed to boost Japan’s quantitative easing measures to achieve this, but they have not at the latest BoJ policy meeting, which was held in April.
In the press conference following the policy decision, BoJ Governor Mr Kuroda stated that the BoJ wished to give itself time to observe the effects of its recent policy step of negative interest rates (announced at the end of January and implemented in February), before adding any additional stimulus. In isolation this is a sensible desire, particularly as one would expect negative interest rates to act upon the Japanese economy largely with a lag. But the predictable loss of market confidence experienced after the non-event meeting seems a high price to pay for it. It is likely, therefore, that there were other considerations behind the BoJ’s decision to hold fire. We believe that by delaying easing at the April meeting, the BoJ is attempting to put a degree of pressure on the Ministry of Finance to ease fiscal policy to stimulate the economy in the near future.
One of Abe’s challenges is to counter the deflationary mindset that has been etched into the Japanese consumer’s psyche after two decades of falling prices and a shrinking economy. The same applies to incentivising retail investors to participate in the stockmarket – they need to see stable and rising share prices in aggregate before they can be confident enough to invest. On these two areas, although Abe has made some inroads – such as increasing the government pension funds allocation to equities and reigniting Japan’s dividend culture – more is still required.
We expect the BoJ to ease monetary policy at its 15 and 16 June meeting. Given the strengthening of the yen and weakness of the stockmarket recently, the BoJ’s reaction function now calls even more strongly for monetary policy easing than it did prior to the April meeting. The policy options for this easing remain quite rich in our opinion, including increasing the rate of its asset purchases, possibly shifting the mix more towards risk assets including equity exchange-traded funds (ETFs) and applying a negative interest rate to BoJ loans to banks, which would potentially improve the efficacy of its negative interest policy framework.
What do you foresee as the main challenges for Japanese Equities going forwards?
For us, the biggest risk to Japanese equities remains continued yen strength. This is because a rise in yen hits the profits of the TOPIX’s large index constituents and therefore puts downward pressure on the share price. Static profits could potentially then lead to static wages, prices (further deflation) and an even more subdued domestic economy. Ultimately, this could see the unions and firms abandon Abenomics and the associated ‘Shunto’ wage increases causing even more of a downward spiral.
Could you tell me about a couple of holdings, and the attributes that led to their inclusion within the portfolio?
The second arrow of Abenomics, announced in April 2013, was focused on fiscal expansion. In particular, it involved boosting construction expenditure. Our in-house real world research identified that this would likely lead to residential housing and land prices rising in Tokyo, Osaka and Nagoya, whilst they would stop falling elsewhere in Japan.
Haseko was a company we identified as a dominant contract condominium builder and refurbisher, used by all the major property owners and developers. Having initially purchased the stock at the end of April 2013 and periodically added up until September 2015, the average price we paid was ¥305.44 per share. Currently, the company is trading at ¥1,201.00, representing a 293% gain for the Fund.
Important information: Investment risks
Neptune funds may be higher risk than other funds and past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the original amount invested. References to specific securities are for illustration purposes only and should not be taken as a solicitation to buy or sell these securities. If you are unsure of the suitability of an investment, please consult an authorised financial adviser. Please remember that forecasts are not a reliable indicator of future performance. The content of this document is formed from Neptune’s views as at the date of issue. We do not undertake to advise you as to any change of our views. Neptune does not give investment advice and only provides information on Neptune products. Please refer to the prospectuses for further details.