Greater China managers divided on Japan outlook

Investors from Taiwan and China take a divergent approach to crisis-hit Japan.

Despite the uncertainty over Japan’s Fukushima nuclear plant disaster, asset managers in neighbouring China and Taiwan say they are sticking to their investments in Japanese equities. But they differ on how to adjust their mix and which sectors to embrace.

Certain strategies have a big Japan allocation, including real-estate investment trusts. For example, Japan accounts for as much as 15% of Reit exposures at Polaris Securities Investment Trust in Taipei. Most of that involves Tokyo assets.

“Before the earthquake, we went on a field research trip to Japan and wanted to increase investment in this part, but now we will hold and not make any changes,” says Julian Liu Tsung-Sheng, CEO at Polaris.

For many equity funds from mainland China, however, Japan is only a small part of the portfolio. Typical is the BoCom Schroders Global QDII fund. Shanghai-based fund manager William Cheng says Japan accounts for only 3% of the portfolio, so there is no need to reduce the position.

He believes over time that the Japanese market will prove good to investors, given it was undervalued even before the earthquake struck.

Taiwanese managers tend to be more tied to the Japan story, because the two economies are closely linked. The Taiex usually trades in tandem with the Nikkei, and it corrected more steeply than other Asian markets last week.

Taiwanese fund managers say they are busy analysing whether, for example, they should reduce weightings of home-grown names in semiconductors and other electronics companies, given their important role in Japanese supply chains.

For now, Taipei managers are trying to figure out exactly how these linkages will play out, which means waiting and seeing.

“Will there be enough inventories if Japanese factories can’t operate on full capacity due to the discontinued electricity supply?” asks Liu.

He is also wary of talk that Japan will spur a big recovery play once the crisis passes. The size of the economy is too big and the damage too severe, and he expects Japanese indices will continue to decline.

“We expect a 10% to 15% further correction of the market, and thus will lower the overall position by 20% and reduce the beta of the portfolio by avoiding volatile stocks and small caps,” Liu says.

He adds that Polaris will not adopt an opportunistic approach by acting upon the short-term rebound. “In the last couple of days, the renewable energy sector, such as solar stocks, has performed strongly, but I think it is going to be short-lived.”

By contrast, BoCom Schroders’ Cheng is waiting for investment opportunities to emerge. “Over history, disturbed market conditions eventually normalise, and every downfall of market creates investment opportunities.”

His team is scouring for ideas in areas such as supermarkets, other retail outlets and infrastructure.

For Taiwan’s Liu, the idea of any sector benefiting seems unrealistic. He believes investors should focus instead on Japan’s blue-chips and its most competitive industrial leaders – the survivors.

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