Japan joins China and Russia with surge in profits for investors who can hold their nerve
The UK economy isn’t the only one seeing green shoots. Some global powerhouses are picking up pace and could offer returns for intrepid investors who can hold their nerve, say experts. Japan is among those enjoying a turn in fortune, with economic reforms to kick-start growth prompting a surge in profits for investors.
The average Japan unit trust generated returns of 34%, compared with 28% from the UK all-companies sector over the past 12 months, say analysts Morningstar, while Japanese smaller companies posted a stellar 45% return.
“Returns like these have seen the pendulum swing for investors – from a fear of losing money, to fear of missing out on gains in global markets,” says Tom Becket, chief investment officer at PSigma. But can Asian and eastern stock markets continue climbing into next year? And what about the risk for investors?
After decades in the doldrums, the land of the rising sun has been shining again since Shinzo Abe took over as prime minister last year. The market surge can be attributed to several factors, including its successful bid this year to stage the Olympic Games in 2020 and, fundamentally, the impact of “Abenomics”. The new leader pushed for fresh waves of money to be pumped into the economy, and doubled Japan’s inflation target to 2% in an effort to end detrimental bouts of deflation.
The bulls still believe there is plenty of growth to come for investors. Darius McDermott, from execution-only broker Chelsea Financial Services, tips Japan as the market to invest in this year, and remains positive about growth into 2014. “It has had a number of false dawns but the political will is properly aligned for investors to make returns going forwards,” he says. Meanwhile, Adrian Lowcock, from Hargreaves Lansdown, says the country is offering rock-bottom share values that are a “stock-picker’s dream”.
But there is a long way to go before the Nikkei 225, the main index, hits the 38,900 peak it reached in 1989 before the bubble burst with a sharp decline in property prices and severe banking crisis. At the time of writing it stood at 15,381, a staggering decline over a near 24-year period, and critics sound a note of caution.
“From an asset allocation perspective there is a strong argument to have exposure to the world’s third biggest economy, after the US and China, and second biggest stock market,” says Patrick Connolly from financial adviser Chase de Vere. “But investors risk ending up battered and bruised, as has happened so many times in the past.”
To spread the risk you can pick pooled funds, such as unit or investment trusts. McDermott favours Legg Mason Japan Equity for investing in smaller stocks. “This is a volatile choice but when it’s in the right spot it performs extremely well.” He also likes GLG Japan Core Alpha if you’d rather stick to investments in larger companies.
Roderick, 69, and Maureen Barnham, 72, a retired couple from Skegness, Lincolnshire, chose to put 5% of their investment portfolio in the Aberdeen Russia fund in March after taking advice from Chase de Vere. “We mostly had investments in the UK and wanted to diversify,” she says. “So far, so good, and we know it’s risky – but the growth prospects seem appealing over the next five years, and we then hope to use the money to help fund our retirement.”
After a disappointing period for investors there is a nascent market recovery taking place which, say experts, may continue following a series of significant economic reforms announced last week. These included a relaxation of China’s one-child policy, and a shift to a more consumer-driven economy.
Lucy MacDonald, chief investment officer at Allianz Global Investors, says: “China is very interesting at the moment, with a better quality and balance of growth that might be slow but is steady, with more coming from the consumer.” Its market has risen by 18% over the past 12 months, according to Morningstar.
Brian Dennehy, of FundExpert.co.uk, stresses that the Chinese stock market is also cheap. “However, those who are anti-China don’t believe it can switch quickly enough to a domestic-focused economy before the demographic time-bomb blows up,” he says. “But sometimes all or most of the bad news is already priced into the market.”
He recommends Fidelity China Special Situations and Henderson China Opportunities. The majority of advisers favour a diversified approach through a global emerging markets fund with a portion in China. Connolly likes Schroder Global Emerging Markets, which currently has 21% invested in China, and JPM Emerging Markets, which has 18%, while Lowcock recommends First State Asia Pacific Leaders with 34%.
Russia, known for political turmoil alongside huge supplies of oil and gas, has been relatively unloved by investors. It is not for the faint-hearted, being universally regarded as one of the riskiest markets. However, Russian equities remain great value, says McDermott. While the risk remains, an upturn in global economic activity and progress in implementing reforms could mean that it is poised to deliver strong returns, says Connolly.
There are plenty of funds to pick from that are attracting a wave of money from British investors. Lowcock says Neptune Russia & Greater Russia remains the widest held in this sector, returning 14% over the past 12 months. Other funds, such as Fidelity Emerging Europe Middle East and Africa, that spread their investments over a wide range of countries and throw in Turkey and Israel as well, are also proving popular.
McDermott likes JP Morgan New Europe, which is currently around 64% invested in Russia.
The minimum investment in most funds is £1,000 as a lump sum, or £50 a month into a regular savings plan. However, take account of initial charges on managed funds, which are typically around 5% but easy to avoid. Discount brokers and advisers, such as Bestinvest and Chelsea Financial Services, refund most, if not all, of this charge when you invest.
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