GLG Japan CoreAlpha Equity's Neil Edwards believes Japan’s unloved technology stocks are finally starting to enjoy positive re-ratings after a difficult 18 months.
Despite strong long term performance, the fund’s contrarian value approach was out of favour for most of last year, and Edwards admitted that technology stocks, along with his other major contrarian value call, banks, were bought too early in their cycle of recovery.
He told Citywire that the December return of prime minister Shinzo Abe with a landslide victory should help to boost the stock market for a little longer due to the new government’s pro-business stance.
Responding to the latest round of quantitative easing in which Abe unveiled a Y10.3 billion (€86 billion) stimulus package, Edwards said: ‘It is bigger than the market had expected, franking that Abe intends to back his words with action.’
But he warned: ‘Japan has been in this situation before and little happened but the new government is market and corporate friendly and if they do succeed in weakening the yen it will be hugely positive.’
While he conceded it was too early to say whether the strategy would ultimately be successful he is encouraged by a renewed determination by Japan’s policy makers to end years of deflation and currency strength.
The trio have been adding a modest level of cyclicality to the portfolio after the market’s latest upturn began in mid-November.
Retail chain Yamada Denki has been bought, and Edwards is cautiously optimistic that the market may make some further gains yet.
‘The [latest rise] feels like it has some legs. We take comfort from the fact that despite a 20% rise in the market, it has still not reached 1x book.
‘It is very clear that Japan is very worried that a strong yen could ruin any recovery and there is a consensus that the Japanese government has prolonged the down cycle with a series of policy mistakes.’
‘We see value in high beta stocks and think our stocks have just started to turn. The market should continue to go higher for now.’
Japan’s two largest banks, Mitsubishi UFJ Financial and Sumitomo Mitsui Financial remain the second and third largest holdings in the fund, while financials group Nomura, the fourth largest holding, has been its best stock in recent months after poor former performance.
‘We were way too early to buy banks and people thought we were mad to hold Nomura.’
Initially that purchase dragged on the fund’s numbers as the company continued to pursue an expansionist policy against a poor economic backdrop, but a more focused approach has reaped dividends more recently.
‘Lehman was a disaster for Nomura as its operations were scaled back in Europe but we were reluctant to sell when it had done so badly and now it is starting to do very well as it has a better focus on profit and loss.’
Tech giants Sony and Panasonic were both added to the fund over the past year as the team believed ‘negativity surrounding them had got too extreme’.
Edwards is encouraged by Panasonic’s multi-cost cutting strategy as it gets rid of non-profit making businesses and focuses on core areas such as its white goods business, and says Sony is doing well from its entertainment and financial operations.
Sony is the fund’s largest stock at 7.1%, and the team expect to see positive developments from its move into the upmarket TV sector.
‘Sony has cut back volume substantially and it is becoming much more focused on the top line [growth].'
Elsewhere, the trio have been reducing some of their more defensive holdings such as railway companies and bought Fujitsu to diversify the tech holdings.
Fujitsu has fallen hard, primarily due to issues with its UK pension fund, while Chubu Electric Power has also been added recently despite the fund being underweight utilities and power generators.
Edwards views both as a hedge against risk, in case the stance is wrong, as is a top 10 holding in Toyota, the fund’s only car maker.
Over five years to the end of December, the fund has returned 20.4% compared to 2.4% by the benchmark Topix index.