While Japan’s long-term track record indeed is pretty poor, the asset class has actually outperformed European equities since the financial crisis, both in local currency and in euro terms. And although valuations have increased this year, Japanese stocks are still slightly cheaper than their European counterparts.
Sweet spot
And there are a couple more reasons why Japanese equities are in a sweet spot, according to Patrick Moonen, a multi-asset strategist at NN Investment Partners.
“Of all major regions, political and monetary policy risk is lowest in Japan,” he says, referring to the recent re-election of prime minister Abe and the central bank’s firm commitment to loose monetary policy. Of all developed market central banks, the Bank of Japan looks least likely to tighten soon.
Currency clues
That should keep a lid on the yen, benefiting export-dependent Japanese companies.
As you can see on the chart below, the fortunes of Japanese equities are closely linked not only to the value of the yen, but also to the strength of the currency of its most important export destination, the US dollar.
Considering this ‘double’ currency risk, it makes sense to at least hedge your Japanese equity exposure back to your base currency to eliminate some of that risk, even though doing so does not improve performance on the long term. But foregoing a hedge means your Japanese equity allocation becomes a dollar/yen currency bet to a significant extent.
Therefore, Vanwittembergh, Romig and Viviani all buy euro-hedged versions of their Japanese equity funds, at a cost of only some 30 to 40 basis points. “We want to concentrate on nominal returns, and want to avoid the possibility to lose money because of a weak yen,” says Romig.
After all, the last thing you would want as an investor after finally having convinced your client to put aside their trauma of the burst of Japan’s stock market bubble in the 1980s, is to then have to explain to them why their returns have been wiped out again, this time because of yen depreciation.
