Are investors ready to ignore market noise?

The ripple effect of negative sentiment can be difficult to reverse

Are investors ready to ignore market noise?

Although it’s difficult to measure the impact of market ‘noise’, it’s clear that it does have an impact. The ripple effect caused by the perceived impact of a political event or some negative headlines can either occur slowly, overtime or happen quickly with little warning. It can be like watching a long row of dominoes collide one by one as investor sentiment shifts from negative to positive or vice versa.

In the case of Japan, the negative publicity has been persisting for two decades. Some of it has been justified by the country’s low growth and decreasing population, but as Japan enters a new period in its history are investors ready shake off their preconceived ideas?

“Japan has had negative publicity for the past 20 years, but with the 2020 Olympics coming up, the country should be on investors’ horizon,” says David Latto, a portfolio manager at Unigestion. “Japan has a lot of well-performing companies that are quite diversified and cash rich. Robotics is huge, automobiles is doing well, as is the financial sector.”

Latto believes that some recent and upcoming structural reforms will further boost the country’s economy and increase international growth potential for domestic companies. The country has traditionally had a low female participation rate in the workforce, which the government is now trying to combat. It’s a strategy that is expected to mitigate the impacts of population decline and, for Japan, the upcoming years look positive. The Olympics will rejuvenate the construction sector while a recently inked EU trade agreement is expected to greatly benefit the nation’s exporters.
“As well as having pockets of growth, Japan is home to some market leaders in a lot of areas, especially in the production of parts for automobiles and electronics,” Latto says. “We saw that after Fukushima when Samsung had to stop its production because most of its parts came from Japan. With the new trade agreement in place, these companies will be able to export parts to European factories.”

Investors looking to take advantage of the growth opportunity should be aware of the integral role that the yen plays in Japanese companies’ performance. If the yen weakens, exporters benefit while organizations with domestic restrictions suffer. But, in an adverse economic cycle, the yen typically becomes a safe haven, which leads to out-performance among ‘domestics’.

While there are North American exchanged-traded-funds that cover the Japanese market, including the iShares MSCI Japan ETF, Latto thinks active strategies are more suited to Japanese equities.

“You would want to focus on something a bit more optimized than a passive ETF,” Latto says. “When we look at Japan, we consider all exposures in terms of FX and what will happen if the yen moves by 2%. How will that affect equity portfolios? These are things that are not picked up in the more passive strategies.”

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