Why invest in Nippon India Japan Equity Fund

24 Jan,  2022
By: Eastern Fin Research Team
#Mutual Funds

Nippon India Japan Equity Fund is a thematic international fund which invests in stocks listed on the Japanese stock exchanges. The scheme was launched in 2014 and endeavours to create a portfolio of companies which may be the leaders or potential leaders in the growth oriented sectors of Japan. Japan, as a market, has underperformed the MSCI World Index over the last several years, but several global investment experts believe that Japan may outperform in the coming years.

Background

  • The period from the end of World War 2 to the late 80s, covering nearly 45 years, was known as Japanese economic miracle. This period saw record economic growth and Japan surpassed most developed markets to become the second largest economy after the United States.
  • This economic growth was result of a virtuous cycle of large trade surpluses, large capex investments in Japanese industry and high productivity, which made Japanese goods very lucrative in export markets.
  • The Japanese Government also encouraged people to save more through their fiscal policies. High savings rate along with large trade surpluses, created a huge amount of liquidity in the Japanese financial market, which led to speculations in stocks and real estate.
  • The stringent tariffs on imports imposed by the Japanese Government and growth in Japanese exports led to large trade surpluses and appreciating currency (Japanese Yen), which attracted foreign investments.
  • This created an asset bubble in Japan by the late 80s and the Nikkei stock index reached its record high in 1989. As was inevitable, the bubble had to burst; the stock market crashed and the Nikkei is still below its 1989 level, even after more than 30 years.

Underperformance of Japanese equity market

  • The period following the Japanese market crash in the early 90s, saw stagnant economic growth and deflation.
  • High value of Yen compared to other foreign currencies also impacted Japanese exports; this was also the time mid 90s onwards, when the emerging economies e.g. China, India etc. were outperforming.
  • The Japanese central bank kept interest rates at nearly zero percent to revive consumption and economic growth. But these efforts did not bear fruit as the country battled with low growth and deflation for decades.
  • The Japanese stock market had underperformed for nearly 30 years.

Policies to revive growth

  • Shinzo Abe who was the Prime Minister of Japan from 2012 to 2020, instituted a series of reforms to revive economic growth. Abe’s economic policies are often referred to as Abenomics, similar to Reaganomics in the US (in reference to US president Ronald Reagan).
  • His policies, rooted in Keynesian theory, have been hailed by economists and have worked to a certain extent, stumbling blocks due to global factors notwithstanding.
  • Corporate earnings have seen growth in recent years, providing a hope that the Japanese equity markets may outperform in the future.
  • The election of Prime Minister Fumio Kishida with a resounding victory in the recent parliamentary election, is seen as “very positive for the market” due to expectations that the country’s leader will introduce more stimulus.

Why are global investment experts bullish on Japan now?

  • Investment experts believe “building blocks” are now in place for Japan to outperform globally in the coming quarters due to the economic policies of the Government.
  • The fundamentals of Japanese equity are strong due to earnings momentum in the recent quarters.
  • The election of Prime Minister Fumio Kishida with a resounding victory in the recent parliamentary election, is seen as “very positive for the market” due to expectations that the country’s leader will introduce more stimulus.
  • Japan has massively underperformed the U.S. equity market this year despite a very strong earnings momentum.
  • Japanese equity market is trading at a very attractive price compared to any other developed markets. It may attract global FII flows.
  • The Japanese yen has weakened around 10% against the USD and is expected to weaken further when the US Fed increases interest rates. Weaker Japanese yen tends to be positive for the equity market.

Why should you invest in Nippon India Japan Equity Fund?

  • Japanese equity has low correlation with Indian equity. Adding Nippon India Japan Equity Fund to your portfolio will provide diversification.
  • Provide exposure to developed markets.
  • Japanese market is under-valued compared to the US market.
  • Outlook of Japanese market is positive.

Who should invest in Nippon India Japan Equity Fund?

  • Investors who are looking for capital appreciation over long investment tenures.
  • Investors who want exposure to international markets for risk diversification.
  • Investors with moderately high to high risk appetites.
  • Investors with minimum 3 to 5 years investment tenures.

You can consult with your Eastern Financier’s financial advisors to discuss if Nippon India Japan Equity Fund is suitable for your investment needs.

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