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Ashburton reveals increase to Japanese equity weighting

Monday 1st February 2010
By Mike Jones

Asset management firm Ashburton has increased its Japanese equity weighting.

Tristan Hanson, manager of asset allocation and strategy at Ashburton, said: "Early in the year we increased the equity weighting of Japan relative to other regions within our Multi Asset and Asset Management Funds.

"Japan now accounts for 25% cent of our equity exposure, increasing from just over 10% late last year.

"On a relative basis, exposure to US equities remains unchanged (40% of equities), while exposure to Europe (20%) and emerging Asia (15%) has been reduced to facilitate a greater Japan weighting.”

Hanson reveals the reasons for the switch:

* "Why bother with Japan?": After a 20-year bear market and another very poor year in 2009, global investors have lost interest in Japan. This is also reflected in valuations which look relatively attractive if one expects Japanese corporations to benefit from a global economic recovery in 2010. With sentiment so poor, we believe it would take little in the way of good news for Japanese equities to outperform other regions where expectations are more demanding.

* Global economic recovery: The best years for Japanese equities on a relative basis have tended to occur in periods of strong global growth (eg 1999/2000 and 2005/06) and rising global interest rates. As outlined in December, we believe global growth is likely to surprise on the upside in 2010. At the index level, Japanese equities offer a very high level of operational gearing compared to most other regions.

* More aggressive domestic policy: Ongoing deflation, a weak domestic economy and the appointment of Naoto Kan as Minister of Finance suggest policymaking to support growth and arrest deflation may become more aggressive in 2010. The Bank of Japan signalled a more proactive stance in December and we believe the positive direction of policymaking in contrast to likely tightening in the US and Emerging Markets is helpful for relative performance.

* Yen weakness: In our view, US bond yields will continue to rise in 2010 and the US dollar is likely to strengthen against the yen, especially if the Bank of Japan engages in more aggressive monetary expansion. The strength of the yen has been a drag on Japanese performance in 2009 and we believe there are good odds that this headwind reverses in 2010.

* Diversification: In our view, Japanese equities offer very useful diversification, especially given our view that one major risk to global equities will be rising US interest rates later in the year. We believe Japanese equities will be less affected by this specific risk and the strength of US growth that would be implied by rate hikes should be very supportive for Japanese exporters.

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