Survival in the Far East

JAPAN has defied the most ardent optimists for the past 20 years. From a peak of 38,000 at the height of the country’s asset price boom in 1990, the Nikkei 225 index has plotted an almost unbroken downwards course. Gross domestic product (GDP) has trodden water at the nominal level of ¥500tr (£3.7tr) for a decade.

Even as the DPJ coalition government promises to rescue Japan from chronic deflation and to double long-term real growth to 2 per cent by 2020, ministers are grappling with a fiscal crisis as frightening as anything seen on the periphery of the Eurozone. An ageing population and the ravages of the global downturn meant tax revenues for the year to March were worth less than government bond issues for the first time since 1946. In a desperate bid to kick-start the economy, the government unveiled a record ¥92.3bn budget in April – a move that will heap more pressure on the state’s coffers.

Few Japan fund managers would be caught enthusing about the country’s domestic prospects. And yet, from the rotting tails of an anaemic private sector, a debt-addled public sector and weak high street consumption, some dedicated stock-pickers are cooking up fresh sushi.

As a portfolio boss who has nearly doubled investors’ cash in Japan over the past five years, Neptune Investment Management’s Chris Taylor has earned the right to be frank. Sitting in a boardroom high above Tokyo, Taylor says the country’s economy is “dying on its feet”. Taylor spent 15 years with Fuji Investment Management before taking the helm of Neptune’s £124.4m Japan Opportunities fund and is all too familiar with the toxic influence of poor governmental stewardship on corporates: in a quagmire of low growth and low consumer spending, companies cut capital expenditure and rein in wages, creating a perpetual cycle that traps domestically-orientated stocks in a terminal tailspin.

But Taylor has managed to extract an 86 per cent return from Japan since 2005. “Investment in Japan is all about investing in companies, not the country,” he explains, comparing the stockmarket to the FTSE 100, whose members derive more than 50 per cent of their profits from overseas. Neptune’s portfolio favourites are firms which dominate their sectors through attention to quality and niche expertise. Toshiba, Taylor says, is geared to the resurgent popularity of nuclear power across the world; Toho Titanium is a market-leading processor of the precious metal which is again in demand as aircraft orders pick up; Elpida, which makes RAM memory chips for computers, is well-placed to benefit from the pick-up in IT sectors in the UK, the US and Europe. Taylor also hedges against a weakening yen, a trick that helped produce star performance despite the credit crunch in 2008.

Neptune is not alone in seeing corporate bright spots amid the gloom of Tokyo’s economy. A recent survey of investment houses by Standard & Poor’s Fund Services found the majority of groups were moving overweight Japanese equities in their global portfolios. The country looks cheap versus other equity markets on both price-to-book and price-to-earnings measures, according to Nomura, which forecasts earnings growth of 60 per cent for the 12 months to next March.

Fund managers appear to be embracing the Japanese proverb: money grows on the tree of persistence.