Interactive Investor

Japan equities soar as Nikkei hits 15-year high

22nd April 2015 14:02

Michael Trudeau from interactive investor

Japan stocks are booming, with the Nikkei 225 closing above 20000 for the first time in 15 years on Wedneday and the broader TOPIX reaching its highest level since November 2007.

Japanese shares have gained 15% since the start of the year.

Alex Treves, head of equities at Fidelity Worldwide Investment, says the rise could be the result of prime minister Shinzō Abe's strategy of reforming corporate governance.

"Japanese companies are actively responding to calls for better governance," he says. 'We are seeing signs of positive evolution in capital management as companies utilise excess cash for dividends and share buybacks and increase returns on equity.

Performance uplift

"Just as the JPX-Nikkei 400 Index and the Stewardship Code have helped to drive return on equity towards record levels, we expect the new Governance Code that takes effect on 1 June 2015 to encourage further improvements in shareholder value. More than ever, there are signs of a broad-based commitment to reforms, and with returns going up, we can expect valuations to rise over the medium term."

This uplift has benefited performance of Money Observer's list of eight Rated Funds in the Japanese Equity group, with short-term performance showing up well across the board, including among trusts that focus on smaller companies.

Baillie Gifford Shin Nippon trust, for example, has returned in excess of 27% over the past three months, although has been becalmed in the past month or so. Its more broadly based cousins Baillie Gifford Japanese and Baillie Gifford Japan investment trust are both up 20% over the period.

Other Rated Funds that stand out for their short-term performance include Aberdeen Japan investment trust and its open-ended cousin Aberdeen Japan Equity, both up 15% over three months. And our income choice for this group - CF Morant Wright Nippon Yield - is up 18.6% over the quarter.

Treves adds that despite risks elsewhere in the world including that of an American cyclical downturn, deflation in the eurozone and a potential "hard landing" in China, Fidelity reckons the mid-term outlook for Japanese equities remains "attractive".

"The coordinated pro-growth policies, the changes in corporate behaviour that are occurring, and the fact that Japan offers reasonable valuation in a global context should support the case for Japan.

"Any near-term corrections should provide investors with good opportunities to increase exposure to the Japanese equity market."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.