Annual Report 2017

Investment Strategies

Regional Equity Strategies

Asian Equities

We have always maintained our faith in ‘Abenomics’ despite its many critics, so it was gratifying to see an upbeat verdict from the International Monetary Fund (IMF) in June this year. In contrast with last year’s verdict, the IMF declared Prime Minister Abe’s inflationary measures a ‘success’ after Japan enjoyed its longest sustained run of growth in more than a decade.

Mr Abe returned from a recent trip to the US to announce a snap general election. Given that the present government could have continued until December 2018 before having to go to the polls, he clearly sees an opportunity to consolidate his grip on power. The Governor of Tokyo, Ms Koike, immediately announced that she was forming the Party of Hope. Although the new party initially gathered momentum rapidly, its chances may be damaged by the charismatic Koike’s decision not to run, leaving her party without a candidate for prime minister. Meanwhile, her arrival dealt the final blow to the opposition Democratic Party, which disbanded. The upshot is that the ruling LDP seems most likely to be returned to power, albeit with a somewhat reduced majority.

The third longest serving prime minister in post-war Japan has a number of critics among the ranks of foreign investors, but we are happy to bang the drum for Abenomics and would welcome another Abe administration. A review of the Abenomics scorecard explains our positive disposition. Since coming to power in late December 2012, his much-needed expansionary policies and reforms have led to tangible achievements across the financial and real economy, with highlights including a 91 percent gain in the Topix Index, a 123 percent surge in corporate earnings, a 78 percent rise in dividends per share, a 34 percent fall in the unemployment rate, a 9 percent jump in housing starts and a 29 percent fall in the value of the yen against the US dollar in an economy full of world-leading exporting companies.

Recent statistics portray the Japanese economy in robust health with a tightening labour market and inflation growing modestly. Although the second-quarter GDP number was revised down slightly, this is actually a recovery being driven by domestic demand. The Bank of Japan’s quarterly Tankan survey suggested companies are in an optimistic frame of mind and planning to increase capital expenditure. Despite this abundance of good news, Japanese equity valuations are close to historic lows, with foreigners continuing to be underweight. As investors, we think it is difficult to conceive of a more positive backdrop.

It was an excellent year for Asian equities and a relatively tough one for our two Asia ex-Japan strategies (Asia ex-Japan and Asia ex-Japan Small and Mid Cap). On 8 November 2016, the US election result drove the US dollar higher and all Asian currencies fell with a large macro move in interest rates. On the same day, Indian Prime Minister Modi’s abrupt decision to demonetise large denomination bank notes caused widescale disruption for both Indian citizens and businesses. Both of our Asian ex-Japan strategies had a significant and longstanding overweight in India and our Indian holdings were badly affected, although trading rebounded swiftly. Our overweight stances in Indonesia also dragged on returns as concerns rose over a religious feud surrounding Jakarta’s Governor which culminated in him losing his bid for re-election and being served with a two-year prison sentence. Investors were also disappointed by the sluggish economic recovery and the slow pace of government infrastructure spending. However, we remain patient and continue to stay the course.

Our core holdings, which have quality, sustainable, long term growth hallmarks, remain largely the same and we retain our conviction in their long term prospects. The long-term track records of our Asia ex-Japan strategies remain excellent, with both OEIC sub-funds ranked first quartile in their peer group since their launch.