Schroder's Rose: Yen Must Stabilise for Japan Profits to Rise

Gold-rated Japan equities investor Andrew Rose says the yen needs to stabilise for corporate profits' prospects to improve in Japan

Emma Wall 16 May, 2016 | 2:40PM
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Last week, Morningstar ran our annual investment conference, on subjects ranging from Brexit and risk management to the cost of funds and the future of advice. Read on for our coverage of the Morningstar Investment Conference UK in our special report: What the Experts Say.

 

Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Andrew Rose, Manager of the Schroder Tokyo Fund.

Hello, Andrew.

Andrew Rose: Good afternoon.

Wall: So, since we last spoke, Japan has introduced negative rates. What's been the impact of this?

Rose: In the short-term, it's been a bit counterintuitive. So, at the end of January they introduced negative interest rates and the yen went up and the market went down which is not what the economic textbooks sort of thought or suggested what should have happened.

I think why that happened, I think, partly because when they introduced negative rates it was at a time of global uncertainty, so the yen attracted safe heaven flows. Also, the time when the market was sort of recalibrating its ideas on how rapidly the Fed was going to ease. So, the external environment I think was the main cause for that rather counterintuitive move. I think in the future if we'd see additional negativity, I think it'd be right to assume the yen strengthens; if anything, probably the yen would weaken in the future.

Wall: And talking about the currency, how much does the currency impact the returns that investors are trying to have from the stock market and is it something that we should be concerned about as an entry point for now?

Rose: Well, in a very direct sense, whether the yen goes up or down versus sterling does in a translation sense effect, returns on the Tokyo fund. But what you're getting at is to what extent does moves in the yen actually cause the market to go up or down. And I do think at the moment with the yen having risen quite sharply in 2016, I would like to see at least it stabilise and then that would give companies more confidence in forecasting profits moving on. At the moment, when the yen looking up every day, it's hard for the companies to bake in a yen view. So, if we get the yen actually stabilising, I think that would improve the prospects for the corporate profits.

Wall: Of course, there has been a little bit of volatility along the way. But looking over sort of multi-year period, the Japan index has come up significantly and those who invested at the right time have benefited from that. If you're looking now though as an entry point, where are you seeing the opportunities with that rally in mind?

Rose: Yeah, I mean, the market has had a sharp move and I would think a lot of volatility. I think the outlook for now is – I mean with the market having fallen somewhat in 2016, you would say some of the sort of fast money has already exited. And then you look at the market and say, is it actually expensive? And assuming profits hold up reasonably well and I accept the profits picture is a bit muted because of the currency.

But if profits hold up reasonably well, the valuation is reasonable, I would say in a P/E and the PBR sense and I can't find stocks that I want to buy. So, I don't see it as being a bad point to be entering now even though from its absolute low Abenomics it's risen. But I'm old enough to remember it when it was 40000 Nikkei; it's only 16000 today.

Wall: Andrew, thank you very much.

Rose: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Schroder Tokyo A Acc £3.72 GBP-0.13Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar