Aberdeen Japan has announced its interim results for the half-year ended 30 September 2015. The Trust’s net asset value total return per share fell by 16.3% in sterling terms over the period, compared to the benchmark index’s total return of -9.4%. The manager’s say that the underperformance was largely attributed to stock selection although gearing also added about 1.5% to the NAV decline. They say that several holdings came under pressure because of their exposure to emerging markets, particularly China. These included Nabtesco; Nippon Paint; Unicharm; and Pigeon. The manager’s believe however that whilst the holdings’ short-term prospects are overshadowed by capital flight away from developing economies, their exposure to emerging markets should provide significant opportunities in the longer term.
In portfolio activity, the only major change was the introduction of Japan Exchange Group, which operates both the Tokyo Stock Exchange and the Osaka Exchange. The managers say that these are essentially monopolistic businesses with high operating leverage. In addition, the company has been proactive in returning excess capital to shareholders.
In terms of outlook, the manager’s say that, whilst normalisation of US monetary and growing concern regarding China’s economic slowdown have troubled global markets, domestically, Prime Minister Shinzo Abe’s plan to revive the economy after two decades of stagnation appeared to have stalled. Second-quarter GDP shrank, after expanding in the first and a recent string of lacklustre indicators revived worries that it may have contracted again in the third. Industrial production underwhelmed, and mild deflation returned after more than two years of remission.
However, they say that the prime minister is trying to revive growth with an updated programme that focuses on boosting the economy, population growth and improving social security. But with the economy stuttering and the leadership committed to reducing its huge public debt, it is unclear how these conflicting goals will be achieved.
The managers expect the Japanese market’s bumpy ride will continue in the months ahead and say that Japan appears vulnerable given its reliance on exports. At home, they say that the macroeconomic environment remains subdued. The yen’s recent strength and slowing Chinese demand have hurt exporters. Household consumption remains anaemic despite firm labour market conditions. With wage growth still tepid, consumers continue to tighten their belts. However, they think that changes may be afoot and believe that the recently-concluded Trans-Pacific Partnership could become a driving force in the longer term. The managers consider that the trade deal signals greater willingness by the prime minister to implement politically-sensitive structural reforms seen as pivotal in lifting Japan out of its long stagnation. They also believe that the corporate landscape looks promising saying that businesses are upbeat, profit margins at their highest levels since the global financial crisis despite the yen’s relative strength and progress on corporate governance is encouraging, if slow.
Aberdeen Japan suffers due to stock selection : AJIT