Royal London’s David Varley says growth in Japan will be largely driven by external factors, notably China’s economy, for some time to come.
The manager of the £279m Japan Growth fund says there are unlikely to be any growth catalysts coming from within the country.
“The performance of Japanese markets will be driven by events external to Japan,” he says.
“People should buy Japan who believe the story of global growth led by China. In this scenario, exporters will do well, potentially better than other exporting countries, because they are cheaply valued and undertook strict cost-cutting during the credit crunch.
“There is unlikely to be any internal political change acting as a catalyst because, with one exception, it has always been a smart bet Japanese politics is largely ineffectual.”
Varley says quantitative easing by the Bank of Japan could stimulate economic growth, but it is unlikely to bring in any new measures.
“The politicians have put pressure on the Bank of Japan to be more helpful and provide more funding at cheaper rates,” he says.
“If it could be persuaded to act, then this could have a positive near-term effect, though there would be concerns about the longer-term impact.
“However, the Bank tried quantitative easing in the 1970s which did not work, so it is unwilling to do it again.”
Varley has recently swapped consumer discretionary exposure for consumer staple stocks. He sold his holding in department store Takashimaya, replacing it with Seven & i Holdings.
“The Democratic Party of Japan introduced child tax credits, which came into force last month as one of the ways to deal with the country’s demographic time bomb,” he says.
“Since the introduction, discretionary retailers have done well, which has left the less economically sensitive convenience stores on low valuations.
“These are not companies that will see massive earnings growth, but they should see improvements and they have more stable income streams.”
Although technology has been on of the strongest sectors of the market, Varley is not looking to close his underweight position.
“Technology stocks are back up to the levels they were in the boom. My view is they have done as much as they are going to do for the time being and I am much more interested areas that are going to perform well in the future.”
