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FSM Fund Choice: Affin Hwang World Series Japan Growth Fund [May 2018] April 30, 2018
Despite the several headwinds, we believe that outlook for Japanese equity still remains constructive. Hence, we are hand-picking Affin Hwang World Series Japan Growth Fund as our fund choice for investors to tap into the investment opportunity in the Japanese equity market.
Author : Jerry Lee Chee Yeong


FSM Fund Choice: Affin Hwang World Series Japan Growth Fund

In our 2018 investment outlook, we have named the Japanese equities as the Dark Horse for 2018 underpinned by the expectation of strong earnings growth, recovering economic fundamental and the attractive valuation. The Japanese equity market as represented by Nikkei 225 Index has started the year with robust performance of close to 6% as of 23rd January 2018. However, the Japanese equity market registered massive drop since the end of January as a result of strengthening Yen, escalating US-China trade war fears as well as Abe cronyism scandal. On year-to-date basis, the Japanese equity market posted a negative of return of -2.1% (see figure 1). Despite the several headwinds, we believe that outlook for Japanese equity still remains constructive. Hence, we are hand-picking Affin Hwang World Series Japan Growth Fund as our fund choice for investors to tap into the investment opportunity in the Japanese equity market.

Chart 1: YTD NIkkei 225 Index

The Wakening Dark Horse – Japanese Equities

Accommodative Monetary Policy

On the monetary policy front, given the Japanese government’s decision to nominate Haruhiko Kuroda for a rare second term as the governor of the central bank, we expect there will be no material change for the Japanese monetary policy. In fact, recently Kuroda also mentioned that Japan needs strong accommodative monetary policy until they achieve the target inflation of 2% while the current rate of inflation was a mere 0.9% in March (see figure 2). In other words, the Bank of Japan is likely to continue pursuing monetary stimulus at least until the end of 2018 which would be supportive to the equity market.

Chart 2: Japan's Inflation

Having said that, given the continuing loosening monetary policy in Japan while the US Federal Reserve is looking to increase the interest rate by 3 to 4 times this year, we believe that the glaring divergence in monetary policy between Japan and United States coupled with the diminishing geopolitical risk and trade tensions are likely to result in a weakening Yen. Hence, with the negative correlation between the performance of Japanese equity and Japanese Yen, the Japanese equity market is poised to benefit from the weakening Yen.

Fundamental Remains Solid

With the both monetary and fiscal continue to remain at an easing stance, we expect that the Japan’s economic activity will remain supported in the coming quarters. Although the Japanese exports slightly moderated over the past two months on strong yen which might be the main drag for Japanese GDP in 1Q2018, it is likely to pick up momentum in the coming months with the expectation of weakening Yen and the continuing global economic growth.

On the domestic front, according to the economist at HIS Markit, the recent rise in total new business inflows despite the contraction in external demand signals a stronger domestic demand, in line with the recent improving consumer sentiment (see figure 3).

Chart 3: Japan Consumer Confidence

On top of that, the business condition in japan remains at the healthy level as shown by BOJ’s Tankan survey readings whereby the small, mid and large companies from both manufacturing and non-manufacturing segments are increasingly optimistic (see figure 4).

Chart 4: BOJ's Tankan Survey Readings

Strong Earnings, Attractive Valuation

Given the synchronized global economic growth coupled with the loosening monetary and fiscal policy, the earnings for Japanese companies have been growing at a healthy uptrend over the past couple of years, showing a strong positive momentum (see figure 5).

Chart 5: Japanese Earnings

At this juncture, the earnings of the Japanese companies as represented by Nikkei 225 Index are expected to grow at 10% and 14% which would translate into PE ratios of 16x and 14x for FY18 and FY19 respectively. Unlike its developed counterparts, the Japanese equity market is trading below its fair levels, thus possesses higher upside potential.

Why Affin Hwang World Series Japan Growth Fund?

About the Fund

Affin Hwang World Series Japan Growth Fund is an equity fund that provides investors with capital appreciation over medium to long term period via investing into the Japanese equities. In order to achieve the investment objective, the fund is mandated to invest at least 70% of the fund’s net asset value in equities while the remaining portion may be invested into money market instruments or deposits.

For investment strategy, the fund manager adopts a bottom-up stock picking strategy in selecting undervalued Japanese stocks that possess growth potential or stocks that subject to mispricing due to some short-term disappointment.

Although Affin Hwang Asset Management is the designated fund manager for the fund, it is sub-managed by one of the oldest and largest asset management firms in Asia, namely Nikko Asset Management Co. Ltd (Nikko AM). As such, for investors who invest into the fund, they are able to tap into the knowledge of the local experts in stock picking and fund managing.

Besides that, the fund also implements a flexible hedging strategy to reduce the impact of foreign currency movements. As mentioned earlier, the Japanese equity would benefit from a weakening Yen but the overall fund’s returns will be dragged by the depreciation of Yen from a Ringgit perspective. Hence, with the hedging strategy, the fund is able to benefit from the potential capital gains while minimizing the currency translation loss from the weakening Yen.

Portfolio Team Outlook

Following the significant correction amid increasing concern over the protectionist US trade policies and the Japanese politics, the portfolio team believe that the Japanese equity market is poised to move upwards as the external environment gradually settles down. They are of the opinion that the continuing global economy expansion as well as the strong earnings results from the Japanese corporations would be the catalysts to the equity market.

From the mid-term perspective, the Japanese companies are expected to enjoy an improvement in their ROE which would eventually translate into a higher stock prices as these companies begin to effect structural changes to their corporate management such as an increased focus on growth investment and shareholders return. In other words, the Japanese companies are now deploying their excess funds more efficiently towards future growth and better shareholder returns through investment in automation and optimization.

The portfolio team is actively looking for undervalued stocks from various perspective including but not limited to firms’ earnings potential and its financial health. They are confident that the current strategy will remain effective as they see nearly 30% of the stocks listed in Topix Index are trading below their book value.

Conclusion

All in all, given the still strong economic momentum, loosening monetary and fiscal policy as well as the higher earnings growth potential and the undemanding valuation, we remain rather optimistic on Japanese equities. As such, by investing into Affin Hwang World Series Japan Growth Fund, investors can leverage on the local expertise from Nikko AM, to tap into the investment opportunity in the Japanese equities.


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