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Nordic confidence on Japan wavers as yen falls

Nordic fund selector demand for Japanese equities took a dive in the first quarter of the year as the Japanese yen’s depreciation over the last two years hit investor confidence in the asset class.

The Japanese yen has fallen almost 10% against the euro since July 2016, and despite a recent rally analysts expect the slump to continue.

Japanese equities had the largest negative shift in sentiment (15%) by Nordic fund selectors over the first quarter of 2018, compared to 22 asset classes analysed by according to Last Word Research.

Compared to the pan-European sentiment, the Nordics were 17% more negative.

According to the data, only 8% of Nordic fund selectors expected to increase their Japanese equity fund holdings over the 12 months to March 2019, 51% expected to hold, 13% to sell, and 28% did not use the asset class.

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Source: Last Word Research

This was compared to the pan-European sentiment where 24% want to buy Japanese equity funds, 48% to hold, 11% to sell, and 18% did not use the asset class.

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Source: Last Word Research

While the dip in sentiment from the Nordics was the largest negative shift, the asset class has now returned to a neutral sentiment overall for the Nordics after a big boost in sentiment during December 2017.

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Source: Last Word Research

Out of all the Nordic countries, the Finnish selectors were the most negative on Japanese equity funds with 21% expecting to sell the asset class over the 12 months to April 2019.

Falling yen

For Danske Bank’s head of strategy Tine Choi Danielsen the biggest obstacle to investing in Japanese equities is the falling yen.

“We are underweight Japan because we expect the yen to continue to depreciate. Japan has a lot of well-known companies with strong brands so it’s not hard to get Nordic investors to buy Japanese equities but our customers worry about currency movements,” she said.

Analysts said that despite the slump in the value of the yen, Japanese exporters still did not represent a good buy opportunity because of the volatility of the currency.

Like the European Central Bank, the Bank of Japan (BOJ) has plans to unwind its quantitative easing policy. However, experts do not expect the bank to wind down its policy anytime soon.

Janus Henderson Japanese equities fund manager, Yunyoung Lee, said he expected BOJ’s QE policy to wind down next year as the current core consumer inflation at 1.4% year-on-year was still below the BOJ’s target of 2%.

Lee said Japanese SMEs had positive fundamentals, attractive valuations, strong market performance, and the potential for stronger earnings growth.

He noted that as these companies were more domestically focused, they were less susceptible to external macro-economic ripples compared to their larger, more globally exposed counterparts.

Danielsen said fund selectors should look out for the currency movements as Japanese equity markets had a tight correlation with going up when the yen depreciated.

“If you want to invest in Japan then our recommendation is that you hedge your currency exposure,” she said.

Danielsen noted that it was also the lack of customer demand that drove the bank’s underweight of the asset class.

She said as Japan’s recovery from the global financial crisis was slower than other developed countries customers lost interest in Japanese equities and Nordic banks closed down their Japanese research teams. “None of the biggest banks had any coverage of Japan but over the last one to two years interest has been increasing again,” Danielsen said.


In terms of flows, the Nordics have favoured Japanese equity funds over pan Europe, according to Morningstar data.

The data found over the three years to March 2018 inflows into Japanese equity funds from the Nordics were at €12.9m and €200.7m over the five years to March 2018. This was compared to €22.3m over the three years for pan Europe and €109.3m for the five years.

However, over the past six months, inflows from the Nordics were less than pan Europe, suggesting that the asset class is not as favourable.

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Source: Morningstar

Top funds

Looking at FE Analytics, within the FCA Recognised universe, the Japanese equity sector returned 18.8% for the three years to 30 April 2018, and 16% for the sector within the Offshore Mutual universe during the same period.

The top performing European Japanese equity fund available for sale in the Nordics was the Atlantis Japan Opportunities fund that returned 78.4% over the three years to 30 April 2018. The fund has a 28.7% allocation towards the services industry.

Coupland Cardiff’s CC Japan Alpha fund followed at 39.8% over the same period and also had its highest allocation towards the service industry at 40.9%.

T. Rowe Price’s Japanese Equity Q returned 38.4% and was followed by Fidelity Japan Aggressive A at 37.7%, and Banque de Luxembourg’s BL Equities Japan BR at 36.88%.

Top five European domiciled Japanese equity funds over the three years to 30 April 2018 v sector

Top European domiciled Japanese equity funds three years to 30 April 2018
Source: FE Analytics

The top funds were found using FE Analytics FCA Recognised and Offshore Mutual universes that are domiciled in either Luxembourg or Ireland, and are available for sale in either Denmark, Finland, Iceland, Norway, or Sweden.

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

Part of the Mark Allen Group.