Iam having the kind of month in which everyone seems to think I am wrong about everything – and they aren’t shy about saying so.
Last week, at a drinks party at the FT, I had barely grabbed my first glass of Krug (courtesy of the FT Weekend magazine’s Mrs Moneypenny) when a man I hadn’t seen for a good year followed up his brief hello with the words: “You’re wrong about the market being overvalued you know.”
Later in the week, I was told that I was wrong to still believe in a long-term commodity supercycle; wrong to think it should be possible to buy a townhouse in Edinburgh for less than the cost of an oligarch’s super-yacht (this one several times over); wrong to think that low inflation is more likely to give way to proper inflation than to long-term deflation; and, of course, wrong to think it isn’t possible for a genuine global recovery to be under way.
Personally, I’m not yet convinced that I’m really wrong about any of this – I’d say it’s still too soon to say if the market boom of 2009 is a bear market rally (albeit a big one) or not; too soon to write off a potential second leg down in the housing crash; and far too soon to claim that the supercycle never existed – particularly given the apparent ongoing growth in Asia.
Still, I wasn’t entirely surprised to open an email from Edward Cartwright of LGT Capital Partners on Wednesday and to have the words “COMPLETELY WRONG” jump out at me from the text. So what this time? I am apparently “COMPLETELY WRONG” on Japan. Far from being a value market on the verge of a real recovery, it is a “market going nowhere”. It is “unable to devalue its currency” and so is stuck with a horribly strong yen strangling its exports; it has an “unproven” new government and a 200 per cent debt to GDP ratio; and finally, it is “suffering horrendously compared to the rest of north Asia”.
If I was looking at it properly, my helpful friend tells me, I would, like him, have no choice but to be “a long-term bear”. So no mercy there then.
Cartwright isn’t the only one to think this, of course – Japan couldn’t be more unloved. However, I still think Japan will move properly one day. How can it not? It is almost alone in the world in being a cheap equity market. It is generally driven by global growth – and, whether you believe it is sustainable or not, we do have global growth.
In addition, it is the most developed economy in Asia, something that surely has to help it out as global economic power shifts east – note, just as a small example, that it is Japanese shinkansen technology that the Chinese will be using to build their new high- speed Beijing-Shanghai train line. GDP even grew 0.6 per cent in the second quarter of the year.
It is also worth noting that it is possible to make money in Japan. I hold a few Japan investment trusts – Fidelity Japan Values and the JP Morgan Japanese Smaller Companies Trust.
These are up 12 per cent and 20 per cent over the past year, despite trading on 16 per cent-plus discounts to their net asset values. So, clearly, it is possible to find some value in the world’s second- largest economy.
Still, according to Cartwright, there is a better way to make money in Japan than just sitting around waiting for fair value to make an appearance. Yes, it’s hedge funds. The market as a whole has barely budged this year but some of the long/short funds have managed to make 30-40 per cent – which is nice.
This, says Cartwright, is partly down to the fact that the market is no longer remotely crowded. “Darwinism has reduced the Japanese hedge fund universe to a group of managers who are harder and wiser,” he says.
It also has something to do with the fact that there are a good many obvious looking longs and shorts in the market – there is clear value among the small caps (as I often write, so I guess I’m not completely wrong after all) and there are also clear opportunities on the short side (in real estate and consumer finance).
So what’s a retail investor to do? Cartwright suggests buying LGT Capital Partners’ managed Castle Asia Alternative investment trust (well, he would, wouldn’t he?), which is 30 per cent invested in Japanese hedge funds.
This isn’t a particularly pure way in – the rest of the portfolio is invested elsewhere in Asia with, inevitably, a heavy China weighting. And, as is the way with funds of hedge funds, it doesn’t come cheap either (on top of the management fees you get to pay a 10 per cent performance fee).
However, it is probably the simplest way – for ordinary UK investors who can’t bring themselves to just buy a small-cap value fund and wait – to get at least some long/short exposure to Japan.
At the moment, you can also buy it at around a 17 per cent discount to its net asset value – something that offers some compensation for any fees you’ll be paying as you hold it.
Merryn Somerset Webb is editor of Money Week and previously worked as a stockbroker. The views expressed are personal. merryn@ft.com
