wide discounts caused by earlier investor reticence make sector tempting for stock selectors
Japanese investment trusts are trading on 17.4% discounts despite the Nikkei rising by some 1.09% in sterling terms so far this year.
HSBC analyst Paul Locke said Japanese shares have fared relatively well on a year-to-date basis, allowing both large and small-cap Japan sector trusts to post NAV gains over the past month, with an average cap weighted return of 6%.
'With discounts at least in part a reflection of customer appetite, earlier indigestion suffered by those investors exposed to the Japanese market appears to be behind the relatively wide risk premium being attached to such trusts,' he said.
The weighted average discount in the Japan general sector was 17.4% on 23 January, while the Japan smaller companies sector was on a discount of 16.1%. This compares to weighted average discounts of 12% in the global growth sector and 7.9% in the UK general sector.
Locke said the Japanese sector continues to offer significant relative value, with wild swings in discounts being driven by confusion over the prospects of returns to be derived from the Japanese market.
'Some trusts have offered relative stability, notably Fleming Japanese in terms of its overall trading range,' he added.
'However, others including the much-vaunted Schroder Japan Growth have displayed a wider disparity than historically riskier investments such as many emerging market trusts.'
Locke warned recent weakness in the yen should be watched for any signs of acceleration, with the Japanese government under pressure to support exporters, who are the main drivers of the economy.
'However, current value on offer in the sector is tempting, with stock selectors such as Denis Clough at Schroder Japan Growth and Sarah Whitley at Baillie Gifford Japan likely to prove the main beneficiaries as confused signals continue to emerge at the pure economic level,' he said.
'Losses incurred by investors exposed to trusts in the Japanese market have been substantial in recent years and any willingness on the part of such investors toward a wholesale move back into the market are, at this stage, idealistic to say the least.
'However, both absolute and relative value are presently on offer, while HSBC would argue that discrepancies in relative value between specific trusts are substantial, providing opportunities for investors to exploit the removal of such differentials.'
Annuity market worth £4bn in 2017
For ‘distress’ caused
Oversees £30bn of advised and D2C assets
Less than a third of top paid employees are women
£1bn business since inception