Share surge suggests 'Abenomics' working, but sceptics remain

By Danielle Levy

Could it really be true, could Japan be back? After two "lost decades" the stimulus programme of Prime Minister Shinzo Abe, dubbed "Abenomics", nearly a year old, seems to be doing the trick, at least as far as investors are concerned.

The Nikkei 225, so often the world stockmarkets' poor relation, is up by a staggering 46 per cent since Abe was elected. The UK's FTSE 250, by comparison, is up 26 per cent over the same period.

However, it is a journey that has hit some bumps along the way. This is best demonstrated by a 20 per cent market fall in late May after Federal Reserve chairman Ben Bernanke announced the US central bank's intention to end its quantitative-easing programme, sending global markets haywire. Since the sell-off bottomed on June 13, the Japanese index has recovered by 8 per cent, with some taking the view that earnings can continue to grow.

The average Japanese equity fund is up 33 per cent since mid-December, while the Legg Mason Japan Equity fund has proved the best performer over the period with a staggering 80 per cent return for investors, followed by the Invesco Perpetual Smaller Companies fund which rose 65 per cent.

With these stellar returns in mind, has the easy money been made? Ruth Nash, manager of the JOHCM Japan fund, says smaller companies with a domestic focus are the ones to watch.

"Although the first result of Abenomics has been to weaken the yen and boost the profits of exporters, ultimately it is a strategy designed to boost the domestic economy and domestic stocks, and these remain extremely undervalued," she says.

As a result, her fund is investing more than ever in small and medium-sized companies.

"Mid and small-cap stocks are where the extreme undervaluation can be found in this market. If, as we believe, this really is the start of a long-term bull market in Japan, then the market as a whole will re-rate. Large caps will perform well, but the performance of mid and small caps could be extraordinary," says Nash.

Legg Mason Japan Equity manager Hideo Shiozumi, on the other hand, is targeting what he describes as companies of the "New Japan": those that can take advantage of opportunities with the elderly population, changes in the lifestyles of consumers and a broadening, internet-oriented economy.

For Andrew Wilson, head of investment at wealth manager Towry, much depends on whether Abenomics can genuinely reflate the Japanese economy. If this happens, the rally could be sustained and even those getting in now could make a killing.

JPMorgan market strategist Andrew Goldberg casts doubt on Japan's recovery, saying wages are still falling and national debt is roughly two and half times the UK's.

But Abenomics isn't just about trying to get people spending. It is also about a dose of what could be called Thatcherism.

However, Michael Stanes, investment director of Heartwood Investment Management, says: "Like many I am deeply sceptical Japan can come up with meaningful structural reform. We think the fundamental problems have not really gone away."

- Independent

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