For professional investors only. Capital at risk.
The past few days in the Japanese market have been a wild ride for investors, with a sharp fall followed immediately by a rebound that regained a large chunk of those losses. The reasons behind this move are complex, but the main triggers seem to have been 1) a perceived slowdown in the US economy; 2) the recent hike in interest rates by the Bank of Japan; and 3) a strengthening of the yen against other major currencies.
The first point has implications for not just for the US, but for global economic growth, and with Japan being an industrial-heavy, export-heavy economy it would be a perceived loser if there were recession elsewhere. This also links to the second and third points, as rising rates in Japan – particularly at a time when the Bank of England has cut rates and the Federal Reserve is expected to follow suit soon – leads directly to the yen strengthening as the ‘carry trade’ unwinds as positions funded by shorting the yen are closed.
Markets regain calm, for now at least
After the initial sell-off, markets were quick to rebound – not just in Japan but in Europe and the US too. To some extent this is the normal process of markets correcting after an overreaction, and to some extent has been driven by rhetoric from policymakers. Shinichi Uchida, deputy governor of the Bank of Japan, said that “it is necessary to maintain current levels of monetary easing for the time being” – typically cryptic wording from a central banker, widely interpreted as meaning that the Bank of Japan is not intending any further interest rate rises in the near future.
So, if one takes a step back and tries to look at the fundamentals, some things become clear. A slowing US economy and stronger yen do undeniably make for a tougher profit outlook for Japanese companies. A small shift in Japanese rates is less meaningful to earnings , however, since there is no meaningful financial stress in the corporate or household sectors and indeed corporate Japan is in fine health (more on this below). Also, the changing nature of the market – with bigger margin positions and more trend-following strategies – creates an environment that amplifies otherwise reasonable market moves, so that’s something that investors need to have a certain amount of patience with.
How did markets get to where they are today?
Since approximately the start of 2022, the leadership of the Japanese equity market – as represented by the Topix index – has been skewed towards sectors with a heavy value and commodity bias. These sectors include Mining, Oil & Coal Production, Iron & Steel, as well as the Banks and Insurance sectors. Meanwhile, the more growth-orientated sector and domestic demand plays have had a much tougher time of it.
The impact of this stylistic environment has presented the Jupiter Japan Income Fund that we manage with some significant headwinds. In a marketplace where funds are often firmly polarised into growth or value styles, the Jupiter Japan Income Fund is positioned in the middle, as a core Japanese equity proposition. Of the top ten performing sectors over the last 2.5 years, we have had exposure to only two (Insurance and Banks).
Value has been driving the Japanese market in recent years
Given these factors, the strong outperformance of Value over the last 2.5 years has presented our strategy with challenges that have been reflected in performance. This was compounded by the market’s recent preference for large caps. We run a multi-cap strategy and therefore have higher exposure to mid/small caps than the index. Up until the start of 2024 the performance of large/mid/small caps had been pretty similar, but since 2024 YTD the TOPIX Core 30 large caps have been on a tear, significantly outperforming the mid/small caps.
Large caps have outpaced mid/small caps so far in 2024
However, we are pleased to note a recent upturn in relative performance and – more importantly – our optimism that the future environment could potentially be more conducive to our approach. In the second quarter of 2024, the Jupiter Japan Income Fund saw c200bps of outperformance versus the TOPIX. Our financials positions were a positive here, with SMFG and Tokio Marine among the winners, as well as NEC which has been a beneficiary of restructuring (see this recent article from us for more information), and the unowned Toyota pulling back after a strong bull run. This was achieved despite the continued strong performance of Value and large caps, and in fact we are confident that the future market environment will turn some of the headwinds we’ve been battling over the last 2.5 years into tailwinds.
Our fund continues to be positioned as a premium yielding, core growth strategy. Recent trading activity has seen us adjust the market cap weightings at the margin, as we’ve tactically added to some large caps by trimming back on some of the mid/smalls, but we retain a relative overweight in mid/smalls (as well as a relative underweight to overseas exposure) and remain comfortable with that on the basis of where we identify the best opportunities.
Corporate Japan is changing for the better
For yen-denominated investors (or those hedging back to yen) the absolute return from Japanese equities over the past few years has been a much better experience than unhedged GBP investors. We are stock-pickers and don’t play the game of trying to forecast currency moves, but we would simply note that the yen’s movements has been so pronounced that – even accounting for its strengthening in the last few days – it is still weak by historic standards. Any further strengthening of the yen may have an impact on stocks, due to the ‘carry trade’, but would also play into the hands of unhedged investors who would receive a currency tailwind as there own investment (in sterling, for example) would hold up better than local market returns.
Japanese market returns have been strong for locals…
… although sterling-based investors have taken a currency hit
More fundamentally, there has been noisy criticism of the Japanese listed corporate sector by no less an institution than the Tokyo Stock Exchange (TSE). In strong language, the TSE has called out the low returns and valuation multiples in Japan versus other markets. It was right to do so – corporate Japan has long had an issue with low return on equity compared to other developed markets like the US and Europe. Cash balances for Japanese businesses remain high by international standards, but 2023 saw a significant increase in share buybacks as well as the first reduction in cash balances since 2011.
This new approach to capital allocation is welcome, but chasing the next buyback is quite a short term solution for investors in Japanese equities. We have kept our focus firmly upon the operations of Japanese businesses and think the outlook is bright on this basis.
Japan has seen a number of good news stories over the years, with formerly staid conglomerates metamorphosing into faster growing, more profitable and globally competitive versions of themselves. The rewards reaped by the likes of Hitachi, Sony and NEC (as mentioned in the article linked above) shows what can be achieved when corporate restructuring is executed well. This is on top of an environment in which corporate Japan is making record profits and where overall analyst coverage remains low which creates fertile ground for active stock pickers like us.
Japanese corporates have beaten even US stocks for EPS growth
Japan still has more than its fair share of businesses which punch well below their weight – hamstrung by excessive organizational complexity and low-growth, low-profit legacy products.
Pressure from the financial establishment, not least the TSE, is giving these companies the social cover to make changes which would otherwise have been unpopular. An ageing workforce makes managing staff levels easier and a growing body of blueprints from previous successes should make management teams less timid to introduce changes. This should benefit not just shareholders but all those who are stakeholders in Japan’s commercial and financial prospects over the longer term.
Jupiter Japan Income Fund – performance as at 30.06.2024
Cumulative Performance (%)
| 1m | 3m | ytd | 1yr | 3yrs | 5yrs | 10yrs | |
|---|---|---|---|---|---|---|---|
| Jupiter Japan Income | 1.9 | -2.4 | 2.7 | 9.1 | 8.7 | 35.5 | 160.7 |
| Topix Index | -0.2 | -4.4 | 6.0 | 13.1 | 16.0 | 35.2 | 129.6 |
| IA Japan Sector | 0.6 | -3.6 | -5.3 | 10.1 | 9.1 | 33.1 | 125.0 |
| Quartile Ranking | 1 | 1 | 4 | 3 | 3 | 2 | 1 |
Rolling 12-month Performance (%)
| 1yr to 28/06/24 | 1yr to 30/06/23 | 1yr to 30/06/22 | 1yr to 30/06/21 | 1yr to 30/06/20 | 1yr to 28/06/19 | 1yr to 29/06/18 | 1yr to 30/06/17 | 1yr to 30/06/16 | 1yr to 30/06/15 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Jupiter Japan Income | 9.1 | 11.5 | -10.7 | 13.3 | 10.1 | -1.9 | 19.8 | 22.6 | 9.6 | 21.8 |
| Topix Index | 13.1 | 12.4 | -8.7 | 10.4 | 5.6 | -2.5 | 9.1 | 23.8 | 9.1 | 18.1 |
| IA Japan Sector | 10.1 | 12.4 | -11.8 | 13.1 | 7.9 | -3.4 | 10.7 | 24.9 | 8.0 | 17.2 |
Past performance is no guide to the future. Performance data is calculated bid to NAV or NAV to NAV dependent on the period, all performance is net of fees, inc. reinvested, I GBP Acc share class. The fund class performance has been extended using the performance of an older share class.
Fund specific risks
Currency (FX) Risk – The Fund can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
Pricing Risk – Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
Market Concentration Risk (Geographical Region/Country) – Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.
Counterparty Default Risk – The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the Fund’s assets.
Derivative risk – the Fund may use derivatives to reduce costs and/or the overall risk of the Fund (this is also known as Efficient Portfolio Management or “EPM”). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the Fund.
Charges from capital – Some or all of the Fund’s charges are taken from capital. Should there not be sufficient capital growth in the Fund this may cause capital erosion.
For a more detailed explanation of risk factors, please refer to the “Risk Factors” section of the Scheme Particulars.
This is a marketing communication. Investors should carefully read the Key Investor Information Document (KIID), Supplementary Information Document (SID) and Scheme Particulars, particularly to the fund’s investment objective and characteristics including those related to ESG (if applicable), before making any final investment decisions. These are available from the document library.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This communication is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This communication is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Past performance is no guide to the future. The views expressed are those of the authors at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued by Jupiter Unit Trust Managers Limited (JUTM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, which is authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM.