Rising sun once again?

Wed Apr 18, 2012

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As Japan marks the anniversary of the tsunami, investors place it back on their allocation map

By Aradhna Dayal

nullWhat a difference a few weeks can make. The advent of spring has not only resulted in sunny skies and flowers all around in multi-coloured hues, but also seems to have brought a certain cheer to the Asian hedge fund land. As if taking their cue from nature, markets are rallying once more and macro clouds seem to have cleared up slightly. Worries on the Eurozone crisis eased in the early part of the year and managers were turning their focus to other issues such as inflation and soaring oil prices. Asian managers have finally been putting the risk back on books, though are remaining cautious on a short-term correction.

March also marked the first anniversary of the devastating Japan earthquake. And in what is perhaps a fitting tribute to the spirit of the nation, we are beginning to see a deluge of rekindled interest in Japan-focused strategies from global allocators.

Investors have excellent reasons to bring back Japan in their portfolios: with over 20% gains in the first quarter, Japan has been one of the best-performing markets in Asia so far this year. More than $250 billion is being spent on reconstruction, and there seems to be a new vitality in the public thinking. At the government level as well, there seems to be policy acceleration, as shown by the massive QE package announced by the Bank of Japan. There is a new energy policy in the works too, which will tilt the scales in the favour of renewable energy, and hopefully lead to cheaper and affordable renewable energy solutions coming out of the country. Meanwhile, depreciation in the yen is boosting the corporate mood as well as exports.

While investors see significant undervaluation at the stock level, merciless consolidation among Japanese hedge fund managers over the past few years has left this space largely uncluttered. This gives rise to a unique situation: opportunities abound and yet there are only a handful of credible Japan managers left in the arena, who are well placed to receive significant new inflows this year as investors correct their underweight positions in the country.

In the words of one talented – and young – portfolio manager I recently had the pleasure of hearing, Japan as a country has risen time and again like a Phoenix from the ashes, and the 2011 earthquake was probably exactly what the country needed to fix its structural problems, all of which will make it more appetising to global investors once again. In short, a land of the rising sun once again.

However, challenges still abound in this uniquely structured market. Adherence to the established systems is causing delays in the completion of the reconstruction work. Inflation remains a major concern, and hedge fund managers, burnt badly by small caps over the past few years, prefer sticking to the more liquid large-cap stocks, thereby making value capture that much more difficult.

Elsewhere in the region, the two emerging Asian giants China and India seem to be at a crossroads. The first is battling inflation and an economic slowdown plus a change in party leadership. The second is facing serious political and economic inertia.

It will be interesting to see how global investors respond, but our view is that we may soon witness a new breed of funds coming to the market: Sino-India strategies that dynamically allocate between these two markets, country-focused credit strategies and more quantitative strategies.

With that in mind, the latest issue of AsiaHedge brings you previews on new funds by industry veterans such as David Ruan and Joe Chan, who are currently readying new multi-strategy platform and quantitative strategies, respectively.

This month, we also turn the spotlight on macro fund managers based in Asia, who in the post-global financial crisis have been carving out a new niche of their own. Despite the rising investor interest, these funds face considerable challenges, especially when it comes to execution, as well as, of course, making the correct market calls.

We hope you enjoy reading the April issue of AsiaHedge as much as you enjoy the colours and fragrances of spring.

ISSN: 2151-1845 / CDC10004H

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