Global Investing

“Abenomics” is the buzzword in Japan these days — it refers to Prime Minister Shinzo Abe’s aggressive reflationary fiscal and monetary policies that triggered the yen’s 10 percent decline against the dollar and 17 percent rally in Tokyo stocks this year.

So it’s no wonder that the Japanese mutual fund market, the second largest in Asia-Pacific, enjoyed the largest monthly inflows in almost six years last month, raking in as much as $11 billion.

With all that new money coming in, will you be late to the game if you haven’t gone in already?

French fund manager Carmignac Gestion does not think so.

Carmignac, whose fund already has a 10 percent allocation to Japanese stocks, says investors’ general loss of interest in Japan since the 1990s has resulted in very low valuations. It estimates Japan’s price-to-book ratio is less than 0.7 times.

So it would seem that the equity market’s 20 percent rise over three months has not exhausted investment opportunities in Japan, provided that currency risk is fully hedged.

Until recently, when you mentioned  ”Japan” in the investment context, you could almost hear a collective sigh of disappointment — it was all about recession, deflation and poor investment returns.

However, sentiment does seem to be finally changing, not least because Tokyo stocks have rallied almost 20 percent since the start of the year, outperforming benchmark world and emerging indexes.

The yen has also been on a (rare) declining trend since the start of February, with the selling momentum accelerating since the Bank of Japan set an inflation goal of 1 percent in a surprise move and boosted its asset buying programme by $130 billion on Feb 14.

The inflation vs. deflation debate has livened up again following the jump in December’s UK consumer price inflation (CPI) to 2.9 percent. Last year you couldn’t move for economists harping on about the output gap and blithely dismissing arguments about imported inflation, rising commodity prices, and oh yes, the little matter of the money supply.

Simon Ward, chief economist at Henderson Global Investors, takes the threat of inflation more seriously. He points out that the big swings in inflation in recent years have been driven by food and energy prices, and the latter are beginning to rebound sharply.

“Many economists believe inflation will stay low due to the industrial output gap, but even that has been picking up,” he adds. The seven leading emerging markets, which together account for 71 percent of combined world GDP growth, are back at normal levels of capacity usage, and will soon move above these.

The recent spate of shark attacks on Australian beaches could mark a turning point in global deflation and signal a change in fortunes for some beleaguered emerging economies, if Nomura strategist Sean Darby is to be believed.

Speaking at a Nomura investors forum, Darby said a chance sighting of a shark on Sydney’s famed Bondi Beach three weeks ago made him realise that prices of grain and other soft commodities — punished of late by global recession fears — could be due for a rebound.

“I actually saw a shark on Bondi Beach and that made me wonder about the impact of La Nina and how there’s a severe drought around the world at a time when many farmers are finding it hard to access credit,” said the Hong Kong-based analyst.

Merrill Lynch economist David Rosenberg's views are well-known for bearing no resemblance to his firm's trademark bull, so when he says European clients seem too upbeat, what he really means is they weren't thoroughly depressed. The New York-based economist just got back from a marketing trip across the Atlantic and didn't find much common ground.

In particular, he said European clients seemed more concerned about inflation than the deflation that he sees coming, and they may have unrealistically high expectations for President Barack Obama.

"Unbelievably ... portfolio managers seem to think they are taking a bigger risk with their careers by missing the rallies than by missing the sell-offs," he wrote in a note to clients. "I can tell you that this is not a condition from a sentiment standpoint that terminates bear markets."

Deflation seems to have replaced inflation as the public enemy No.1 these days.

This might give relief to quite a number of people, including those who thought the resurgence of inflation could take us back to the 1970s.

“We thought we would be wearing platform shoes again, like in the 1970s,” says Philip Saunders, head of investment strategy at Investec Asset Management.

“A potential return of inflation is not something people are worried about but maybe that’s what people should be worried about,” he told participants at an investment outlook briefing in London.