JAPAN - The fortunes of pension schemes' Japanese equity investments may be reversed by small gains in the long term growth rate, according to Threadneedle Investments.
Its research has shown that fiscal reform and consequent improvements in economic fundamentals could correct heavy market losses.
Threadneedle Investment’s head of global strategy Colin Robertson said: ”If stock market earnings are 10% less than expected this year and a further 20% less than expected next year our research shows that it would still only take an increase of 0.25% in the long term growth rate to correct this.”
Pensions managers have seen Japanese equity investments slide in value by nearly 24% in the year to March 30 and a massive 5% in June alone, according to figures from the WM Company.
WM said UK pension funds held an average of 3.8% of their assets in Japanese equity at the end of the first quarter compared to 4% at the end of 2000 and 5% at the end of 1999.
With prime minister Koizumi overcoming his first obstacle in winning 65% of the seat in the upper house election the opportunity for reform has never been higher and pensions managers may feel that they should sit tight and wait for the recovery or even take advantage of attractively priced stocks.
CAPS research and development director Alan Wilcock said over the last 10 years the Japanese market fell from one-third of the total market capitalisation of the non-UK equity index to one-eighth.
But he said: “While pension funds have historically underweighted Japan, that position has been reversed in the last two years. This primarily occurred in the year to March 2000 when Japan significantly outperformed other markets and new money was invested. The year to March 2001 was, in contrast, disappointing but pension funds still remained overweight.
Robertson concluded: “Japan is at a genuine crossroad and changes are going to happen. Japanese equity is not expensive on any valuation methods we consider while the US is not cheap on any of the methods that we use.”
By Jonathan Stapleton
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