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Japan stock market and funds review – a brighter outlook ahead

We look at how Japan’s economy and stock market has fared, where the opportunities could be and how Japanese Wealth Shortlist funds are doing.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Japan’s experienced a roller-coaster ride over the last year. It’s seen a historic plunge in the yen’s value against the U.S. dollar and decade-high levels of inflation.

On top of this, echoes of the pandemic are still reverberating across the economy. Some companies continued to have their operations restricted at times during 2022, which naturally hindered the country’s recovery efforts.

While 2022 might have been a year to forget, the outlook for 2023 is brighter.

We take a deeper look into what’s happening in the economy, how the stock market has reacted, as well as the impact on our Wealth Shortlist Japanese funds.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice.

What’s happening in the economy?

The Japanese economy grew by 1.1% over 2022, and while positive, this was slower than the year before.

Japan’s economy wobbled during the autumn of 2022. This raised concerns its recovery, which had only just started, was already over. A notable drop in Japanese exports was the main culprit. However, Japanese imports were stable, which indicates domestic demand is still strong.

Approaching the end of 2022, expectations of the economy stabilising grew. This was thanks to a rebound in exports, relaxed COVID-19 restrictions and reopened borders. So far, this has been the case and the forecast for growth in 2023 has increased slightly to 1.8%.

Borders have been opened to foreign visitors, which has boosted tourism-related sectors and increased spending throughout the economy. The end of the zero-COVID policy in China has also been welcomed. The restrictions dampened trade between the two nations, however exports to China have now started to improve.

Moving forward, there are certain factors that will determine just how well Japan’s economy does – inflation being brought under control, wage increases, the rebound in domestic demand and Prime Minister Kishida’s economic policy are just a few.

However, the Bank of Japan’s (BoJ) different policy approach to other major central banks so far is a source of potential uncertainty. Despite a falling yen and rising inflation, it’s decided to keep interest rates the same, remaining firm outliers compared to other central banks around the world.

If rates start to rise, this could help combat rising prices, stabilise the yen and help the economy. But the BoJ remain steadfast for the time being, stating it wants ‘good’ inflation and to provide continued support for the economy.

Exploring the Japanese yen – a ‘safe haven’ currency?

How’s the stock market reacted?

While the Japanese stock market saw some positive bursts of performance in 2022, overall, it experienced its first annual fall in four years. It was largely driven by the war in Ukraine and fears about a potential global recession.

However, the outlook going forward is much brighter. Some now believe it will reach new highs by the end of 2023. Past performance isn’t a guide to the future.

We’ve also seen interest reignited in 'value' companies. Japan is considered one of the most attractive markets for value stocks, and as global inflation remains high, the case for investing in these types of stocks is strengthening.

A lot of Japanese companies are still undervalued, despite strong profit reports and healthy balance sheets. So it could be an opportunity for investors, though there are no guarantees.

One year performance - Japanese stock market versus other global stock markets

Past performance isn’t a guide to the future. Source: Lipper IM, to 31/03/2023.

Annual percentage growth
Mar 18 – Mar 19 Mar 19 – Mar 20 Mar 20 – Mar 21 Mar 21 – Mar 22 Mar 22 – Mar 23
FTSE All-Share 6.36% -18.45% 26.71% 13.03% 2.92%
FTSE Asia Pacific ex Japan 3.99% -11.24% 44.78% -4.30% -2.99%
FTSE China -5.34% -6.85% 41.78% -25.22% -6.91%
FTSE Emerging 1.90% -13.03% 40.78% -3.31% -3.87%
FTSE Japan -0.85% -2.14% 26.27% -2.32% 1.95%
FTSE USA 17.72% -2.32% 42.72% 19.30% -2.36%

How have our Wealth Shortlist funds performed?

Japanese Wealth Shortlist funds delivered mixed performance over the year as different investment styles came in and out of favour.

Funds investing in companies undergoing a turnaround, otherwise known as ‘value’ focused funds, did well. Those investing in companies with the potential to generate above-average earnings growth, also known as ‘growth’ funds, took a hit.

One year is a short period to assess the skills of a fund manager. Managers with different strengths, styles and areas of focus will perform differently at different times in economic cycles. All investments can fall as well as rise in value, so you could get back less than you invest.

We think it’s sensible for investors to invest in a variety of managers with different investment styles and strategies to make sure your portfolio is properly diversified. Though, investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own and understand the specific risks of the fund before they invest.

For more details on each fund and its risks, see the links to their factsheets and key investor information below.

Over the past 12 months, Man GLG Japan CoreAlpha was the best performing fund in the Japan sector of the Wealth Shortlist. The fund returned 11.13%* over this period, beating the broader Japanese stock market by 9.18%.

Lead manager Jeff Atherton is a true value investor. He scours Japan for lowly-valued companies that have fallen on hard times which he believes hold potential for a recovery. He wants to invest in companies that are ‘cheaper’, in other words, sitting at a lower share price than their true worth, but could bounce back or undergo a turnaround.

Over the last 12 months, this style of investing returned to favour with investors and has helped drive performance. Good stock picking from the manager, alongside strong performance in financials and industrials, also helped drive performance.

Find out more about Man GLG Japan CoreAlpha, including charges

Man GLG Japan CoreAlpha Key Investor Information

Over the same period, the FSSA Japan Focus fund fell 7.40%*. The lead manager Sophia Li is a much more growth-focused investor, favouring companies she deems high quality and capable of generating above average earnings. This style of investing hasn’t been in favour with investors in the last year, so naturally the fund’s performance has been hampered.

When value is in favour, sectors which are linked more closely to the economy tend to do better, including financials and oil and gas. These aren’t areas Li tends to invest in, so she’s missed out on some of the gains made here.

That said, styles have come in and out over the last six months, so the fund has showed signs of recovery. This is a very short period to judge performance though.

Find out more about FSSA Japan Focus, including charges

FSSA Japan Focus Key Investor Information

We think these funds could dovetail well in a portfolio and both have the potential to perform well over the long term.

Annual percentage growth
Mar 18 – Mar 19 Mar 19 – Mar 20 Mar 20 – Mar 21 Mar 21 – Mar 22 Mar 22 – Mar 23
FSSA Japan Focus -2.77% 10.10% 37.55% -9.84% -7.40%
Man GLG Japan CoreAlpha Professional -1.95% -19.22% 29.20% 8.66% 11.13%
FTSE Japan -0.85% -2.14% 26.27% -2.32% 1.95%
IA Japan -3.69% -3.52% 31.87% -4.46% 0.63%

Past performance isn’t a guide to the future. Source: Lipper IM, to 31/03/2023.

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    Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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