Hunt opportunity
closer to home


Janus Henderson Asian Equities

Make Asia your territory. Explore our Asian Equities brochure.

Introduction

Accessing the world’s growth engine

Attractive valuations, favourable demographics and greatly improved corporate governance levels have led to Asia emerging as the ideal hunting ground for equity investors.

Janus Henderson offers six different ways investors may capitalise on Asia’s rise and earn their stripes.




Why Asia?

The remaining year should see a reversal of monetary policy led initially by the US through a gradual increase in interest rates. The next phase of the economic cycle should prove advantageous to Asia. Consumers in this part of the world are enjoying real wage growth and are relatively less exposed to a higher level of personal debt. The region is also increasingly being characterised by improving corporate fundamentals across many of its key markets as well as market-leading earnings growth.


ASIA EX JAPAN DIVIDENDS SOARED 18.8% IN 2017 TO A RECORD1

$139.9bn

ASIA EX JAPAN EQUITIES WAS UP ALMOST

40%

IN 20172



MSCI CHINA OUTPACED MSCI WORLD INDEX BY

30%

LAST YEAR2

JAPANESE DIVIDENDS PAID IN THE ENTIRE 2017 ROSE

US$70.0bn

AN INCREASE OF 11.8%1





Source:
1. Janus Henderson Investors, as at December 2017
2. Bloomberg, as at December 2017

Asian Growth

Overview

  • Asia ex Japan equities posted strong performance in 2017 and was up almost 40% in US dollar terms1.
  • China continues to divide investors, but the team is encouraged by the reforms that the government has undertaken, both on the supply side and also in addressing leverage in the financial system.
  • We see value in South East Asia, which had been looked over in previous years as ETF money flowed into larger indices in more developed markets. Opportunistically, we’ve identified good opportunities in Singapore, Malaysia and The Philippines.

Asia on the up and up

The investment case for Asia is as strong as ever. Although the market had structurally underperformed global and developed markets for the last four or five years, the tide looks to be changing as Asia ex Japan equities posted strong performance in 2017, up almost 40% in US dollar terms. A large portion of those returns was supported by earnings growth at close to 20%1 whilst Asian currency strength also contributed positively.

Read more  >

Source: Bloomberg, day to day total return gross dividends in 2017. Past performance cannot guarantee future results.


Opportunity for those who seek it

The technology sector led the charge for that period, particularly the Korean memory and Chinese internet sectors. China continues to divide investors with the bulls supported by the recent strong market performance whilst the bears continue to point to the amount of leverage in the financial system. While these concerns remain valid, we are encouraged by the reforms that the government has undertaken, both the supply side reforms in addition to a renewed focus on addressing deleveraging. We continue to find many attractive investment opportunities in China and believe that will continue in spite of any macroeconomic slowdown so long as a discerning, selective approach is used to select these names. Chinese banks, for example, are beginning to address non-performing loans with higher provisioning and the improvement in the economy since the 2016 stimulus allows them some more breathing room.

Certainly, reforms have been a theme that has impacted investor sentiment towards Asia in recent years, but it also cuts both ways. In India, where the economy is more domestically driven, there were significant implications for quoted companies from the demonetisation event of 2016 and the introduction of goods and services tax in 2017. Corporate earnings fell short of expectations as a result but again we would highlight that some sectors, particularly the private sector banks, have continued to perform well.

A cautious eye on Oz

Looking farther south, we view the Australian market with a cautious eye. Banking stocks dominate the market and, at the time of writing, have been under pressure from the wide-ranging Banking Royal Commission, which may put downward pressure on returns. Commodity stocks also play a significant role in the Australian market. New management teams put in place following the commodities downturn now find themselves having to deal with ill-timed acquisitions of the past. On the up side, top executives at global miners are now intensely focused on boosting cash returns to investors, something which should be of appeal to dividend seekers.

Value in South East Asia

ASEAN markets had been marginalised by ETF money flowing to the larger index countries in recent years, so we do see some value in some of the markets there. Our belief is that oil prices have recovered and forthcoming elections should be good for the domestic market in Malaysia whilst in Singapore, we continue to see improving margins and returns for the banking sector. The Philippines remain a firm favourite as well. From a top down perspective, the economy has enjoyed several years of strong growth so there may be a need to increase rates to cool that slightly, but we continue to see good opportunities in the consumer related sectors.

Gaining recognition

Overall, global institutional inflows have helped bolster the case for Asia. Flows into the region accelerated towards the end of 2017. Q1 global volatility did little to undermine the positive sentiment and we detected none of the historical kneejerk outflows that can affect Asian markets when global equities are stressed which is an encouraging sign.

Overall, global institutional inflows have helped bolster the case for Asia."

Active is key

An influx of active money in recent months is good news as we continue to believe that investors need to be selective when traversing Asia’s complex markets. Within our Asian Growth fund for example, we benefited from our exposure to the larger technology companies last year but whilst we continue to like many of these businesses, we have reduced the level of our overweight on valuation grounds.

The consumer sector picture is more nuanced, with a significant disparity in valuations across the region. It is not uncommon to see large Indian consumer stocks on 40x1 earnings, but some Chinese consumer names have underperformed in recent years, opening up pockets of value opportunities.

Many large Asian firms are either family-run or government-backed, and active managers have the advantage of being able to monitor corporate governance levels to ensure they as shareholders get the best returns from the underlying operations.

Again, we believe that an active, research-based stock picking approach can help to unearth opportunities and just as importantly, avoid pitfalls. If these requirements can be met, we think it is a good time to be an investor in Asia.



Source: 1. Bloomberg, as at December 2017



Janus Henderson Horizon Asian Growth Fund

Andrew Gillan
  • A high-conviction, multi-cap research-driven Asia ex Japan portfolio managed without significant constraints at sector or country levels.
  • Portfolios are constructed using a core of quality stocks to reduce volatility, with an allocation to dynamic stocks to diversify sources of excess returns and improve upside potential.
  • Asia-based team with direct access to first hand and local knowledge.




Asian Dividend Income

Overview

  • 2018 looks promising for some of the sectors which had lagged relative to technology last year. Energy and financials sectors, for example, appear attractively valued.
  • Government-led reform has been a big driver of dividends in the region. With the exception of India, where pace of change has disappointed, results have been positive.
  • Dividend growth arising from the reform-led change in corporate culture has really come through. According to the latest Janus Henderson Global Dividend Index, which tracks dividends paid globally, Asia ex Japan dividend growth in 2017 hit a high of $139.9 billion1, a figure representing an 18.8% increase over previous years' figures.

2018 opportunities in Asia

The investment case for Asia in 2018 remains a compelling one. The region’s economic and political leadership are strong, corporate earnings impressive and market valuations, as a whole, still reasonable.

But whilst 2017 had been a year for Asian technology, earnings momentum for the sector is set to slow in 2018. We think this will lead investors to question lofty valuation levels for sectors such as technology and look to rotate into more attractively valued opportunities in areas such as energy and financials.

We think the opportunity set for the remainder of 2018 lies in some of the sectors which had lagged relative to technology last year.

Read more  >

Where the upside resides

For example, Asian financials is one sector that, at the time of writing, represented good value. One reason for that is the improving outlook on Asian banks’ non-performing loans. This is true particularly of the Chinese banks. Sectors which have previously been especially stressed, for example, commodities and industrials, now face the prospect of better growth and have become less risky. Borrowers from these areas now have better prospects of servicing their debt, thus improving outlook for lenders.

Another angle that buoyed our sentiment for banks is financial deregulation in the US. This loosening of rules creates a very good business environment for the financial sector overall. We view this as an opportunity for 2018, and have been adding more exposure in that regard. Finally, as rates rise generally across the world, the outlook for bank lending margins also improves greatly.

Another angle that buoyed our sentiment for banks is financial deregulation in the US."

Beyond financials, Asia’s energy sector is another space in which we have identified opportunity over the near to medium term. This is with regards to the more traditional exploration and production names as the oil price remains resilient. However, refiners have done very well for the last two years for us and we had earlier in the year reduced allocation to these slightly.

From a geographical perspective, we feel more positive overall about North Asia versus South East Asia and India. The portfolio, at the time of writing, leans in favour of China, Hong Kong, Taiwan and Korea. We have seen that in terms of earnings potential, in terms of dividend growth and in terms of valuation. North Asia represents a better prospect.

Bumpy ride ahead?

There are a number of geopolitical and policy risks and future bouts of unexpected volatility that could disrupt markets for the remainder of 2018. From our perspective, we feel some valuations, for example in the tech space and industrials, to be unsustainable and earnings growth expectations too high. In the wake of February’s global market turbulence, we feel further corrections are possible. Due to the emergence of quantitative and algorithmic trading strategies, these kind of events could trigger indiscriminate sell-offs.

This is when we see opportunity to add unique business models with strong balance sheets and high sticky margins — in periods of corrections. As recent experience has shown, the rebound from these events can be quite sharp. We believe quality businesses producing strong free cash flow and dividends will never go out of fashion. On that basis we favour absolute valuation matrices such as cash flow, for example, to determine a valuation range for our holdings.

We believe this approach helps to uncover real opportunities even when they are out of fashion, and helps decisions as to whether one should add in market sell-offs as there is some estimate of intrinsic value and not just benchmarking against other similarly expensive peers.

Dividends

More specific to the fund, Asia’s reform story really kicked off around 2014 with leadership changes in Indonesia and India, two of the region’s most populous countries. China itself had commenced its own reformation process under the auspices of President Xi Jinping who had come to power two years prior. The results since then, with the exception of India where the pace of change has somewhat disappointed, have been quite positive.

All of this reform has led to better corporate governance for the region and has led to continued higher levels of institutional shared ownership which, again, is driving better corporate governance.

But the real highlight is that the dividend growth arising from this change in corporate culture has really come through. According to the latest Janus Henderson Global Dividend Index, which tracks dividends paid globally, Asia ex Japan dividend growth in 2017 hit a high of $139.9 billion, a figure representing an 18.8% increase over previous years' figures.

Source: Janus Henderson Investors, as at December 2017.

As dividend seekers, this trend came through in a very strong way for us. We believe this will continue to be the case in 2018.

Outlook

Looking forward into the remainder of 2018, we do expect further volatility as compared to 2017. We think geopolitical risk to be a factor worth monitoring. Further, we expect US bond yields to increase and the ensuing stronger dollar we expect to follow. This will have the potential to cause some disconnect in Asia.

And while Asia’s looking very good from a macro point of view, the risk is always from external events. Countries such as Indonesia and the Philippines may be more susceptible to that kind of move, but the fund actually holds very little exposure there. North Asia, given the strength of current account surplus, foreign exchange reserves, GDP revisions and so on, is actually in very good shape. So we are less concerned about North Asia in that kind of scenario.

Having said that, the region as a whole boasts some of the strongest rates of dividend growth, consumption and earnings growth in the investable universe, and we continue to believe that investors taking a considered, long term, stock picking approach to investing can expect do well here.



Source: 1. Janus Henderson Investors, as at December 2017



Janus Henderson Horizon Asian Dividend Income Fund

Sat Duhra
  • Concentrated portfolio reflects the managers’ best ideas. Around half of the holdings are quality, high-yielding companies with sustainable earnings, cash flows and attractive valuations.
  • Selective use of derivatives to enhance income.
  • Generate returns through income and long-term capital appreciation.




China

Overview

  • China had a stellar year, with the MSCI China outpacing the MSCI World index by about 30% in returns in USD terms1.
  • The Chinese consumer continues to be the foundation of our investment case. We continue to be bullish in this area and focus our efforts in sectors which benefit from consumer spending. These sectors are varied, ranging from staples to healthcare and of course internet service providers.
  • After several difficult years, Chinese companies have been reducing costs, and cutting capital expenditures where returns no longer justify new investments. There has also been a willingness to pay out better dividends in corporate China. We continue to find pockets of opportunity in Hong Kong listed Chinese equities, domestic A shares and US listed China ADRs.

China: lots to cheer about

Chinese stocks had a stellar 2017. Investors in Chinese markets were pleasantly surprised by better than expected macro conditions and the subsequent positive earnings revisions. This helped set a very constructive backdrop for China equity markets going into 2018.

Since then, the market has experienced some turbulence. February saw a sudden, partial reversal of January’s strong gains triggered by regulatory action on new share pledging and further tightening targeting non-banking financial institutions. The sell off in global markets only added to volatility in the Chinese market. As the first quarter of 2018 draws to a close, our view is that the profit and cashflow cycle that started in 2H2016 will remain supportive of China stocks.

Read more  >

For the remainder of this year, we expect the continued efforts to lower financial risks through "de-leveraging" will result in tighter credit availability from non-bank channels. Despite the macro environment experiencing some slowdown, domestic consumption will continue to provide support and private sector capex should hold steady. After several years of deflation, Chinese companies have been cutting costs and reducing capital expenditure where returns no longer justify investments. We have also seen corporate China paying out better dividends over time.

Despite the macro environment experiencing some slowdown, domestic consumption will continue to provide support and private sector capex should hold steady."

Consumption continues to carry credence

The Chinese consumer continues to be the foundation of our investment case. We continue to be bullish in this area and focus our efforts in sectors which benefit from the consumer who is getting wealthier and becoming a more discerning purchaser of goods and services. These sectors are varied ranging from staples, premium autos, auto parts, travel and travel infrastructure, premium liquor, healthcare and of course internet service providers who are ubiquitous and providing content, games and advertising as well as a social network to Chinese consumers.

We also like the improving profit and cashflow profile of industrial China where we are seeing positive change. Pricing power is returning, cash-flows improving and debt is being paid down. This, in turn, is leading us to take a bullish view on some of the large commercial banks. This is a significant change for us as, we had avoided investing in Chinese banks for some time previously.

Value for those who seek it

Some growth stocks in China have enjoyed a significant re-rating over the past several years. We continue to identify value in specific parts of the market, such as in energy, basic materials and financials where the supply-demand environment is allowing for a pricing environment conducive to healthy profits and cash-flows. We recognise that after 2017’s strong gains, the opportunity set is more specific this year than last, and a considered stock picking process is key.

Reform

We have seen some evidence of “reforms” China style. These are state mandated reforms rather than reforms created by forces of market supply and demand but have nevertheless taken excess capacity out of China’s old industrial sectors and led to a return of pricing power to industrial China. The focus on the environment today is creating a backdrop where the largest and strongest companies with environmental permits can continue to operate and do well, while smaller companies without these licenses continue to lose share of market.

One eye open

Chinese monetary conditions have been tightening for a few months as attempts to de-lever the financial system continue under the stewardship of determined regulators. This is unlikely to be an orderly procedure. Regulatory tightening of the non-bank financial institution channels may constrain liquidity and credit to asset markets and to SMEs. Although the first of the US’s steel and aluminium tariffs are unlikely to have a very large impact on China, the move itself could trigger a beggar-thy-neighbour policy which could negatively impact global trade. We continue to monitor the development closely and take comfort that companies in our portfolios are selling into the domestic consumer.

Looking ahead

We believe the improvement in corporate profitability we have seen last year sustains and that the Chinese economy is well supported through 2018, despite slowing of year-on-year growth rates. The cycle of improving corporate profitability and cash flows is in place and a more profitable corporate sector is also having a positive impact on consumption. After several difficult years, Chinese companies have been reducing costs, and cutting capital expenditures where returns no longer justify new investments. There has also been a willingness to pay out better dividends in corporate China. We continue to find pockets of opportunity in Hong Kong listed Chinese equities, domestic A shares and US listed China ADRs.

Source: Janus Henderson Investors, Bloomberg as at 2 March 2018
Note: Past performance is not indicative of future results.



Source: 1. Bloomberg, as at December 2017



Janus Henderson Horizon China Fund

Charlie Awdry
  • Managed by Charlie Awdry and May Ling Wee with combined experience of more than 30 years’ investing in China.
  • Actively-managed equity fund designed to deliver long-term capital growth from the dynamic Chinese economy.
  • Long/short strategy: in addition to long-only positions, the fund may short individual stocks.




Asia-Pacific Property

Overview

  • The Listed Property sector has been characterized by consistent earnings and dividend growth as reinvested dividends have accounted for a large proportion of the total returns.
  • In recent times, Listed Real Estate’s performance has been negatively affected by the perception that the asset class is disproportionately harmed by rising interest rate. In a moderately rising rate environment, we don’t see Real Estate facing disproportionate challenges vis a vis other sectors.
  • Disruption of traditional sectors is another driver that has unearthed promising ideas for the fund.

Asian property stocks show promise

2017 was a very strong year for global equities, with Asian markets leading the charge. Whilst Asian Property Equities lagged the wider equity market last year, over the long term Asian Property Equities have outperformed.

Read more  >

Past

The sector’s outperformance stems from inflation linked earnings growth, and property price appreciation. In addition, the diverse nature of the asset class across Asia provides benefits of diversification that enhance risk-adjusted returns1.

The diverse nature of the asset class across Asia provides benefits of diversification that enhance risk-adjusted returns1."

EPRA/NAREIT Pure Asia Index refers to Property equities and MSCI Asia-Pacific Index refers to Non-property equities.
Source: EPRA/NAREIT Pure Asia Index and MSCI Asia-Pacific Index per Bloomberg, as at 31 January 2018. Indices are rebased to Dec 2002 = 100.
Note: Past performance is not indicative of future results.

The Listed Property sector has been characterized by consistent earnings and dividend growth as reinvested dividends have accounted for a large proportion of the total returns.

The current dividend yield for the asset class is 3.5%2. There is also a very healthy buffer between dividend payout ratio and earnings ratios. With strengthening economic activity leading to healthy leasing activity, listed property firms are expected to deliver earnings growth of 4% to 6%2 this year, in excess of inflation. This will translate into higher dividend payments. Commercial real estate owners are landlords to the economy; as economic output increases, so do rents.

Present

Listed Real Estate's performance has been negatively affected by the perception that the asset class is disproportionately harmed by rising interest rates. In a moderately rising rate environment, we don’t see Real Estate facing disproportionate challenges vis a vis other sectors. An important driver of this resiliency has been REITs’ steady historical earnings growth which we expect to continue. After all, REITs are not bonds; their cash flows can grow.

Since roughly the fourth quarter of 2016, listed real estate has underperformed the broader equity markets to a degree rarely seen as market participants have become relatively more optimistic on US tax reform and reflation driven growth in other sectors. This has led to historically attractive relative valuations for the asset class.

As a whole, we think valuations for the region remain attractive with most of our markets in Asia trading at a discount to NAV. This also has led to REIT dividend yields becoming more attractive in absolute terms as well as relative to bond yields.

Fiscal Year 2018 estimates.
Source: UBS estimates, as at 30 March 2018.

Future

As we move through the cycle it is becoming increasingly necessary to be selective into which sectors and companies we invest.

Disruption of traditional sectors is another driver that has unearthed promising ideas for the fund. For instance, the challenges facing the retail sector are well documented due to the onset of e-commerce. The e-commerce market in Asia is projected to grow to US$1.6tn in 20213. Modern logistics has been a key beneficiary of the growth in e-commerce and is one of our largest sector overweights.

As we move through the cycle it is becoming increasingly necessary to be selective into which sectors and companies we invest."

Technological advances, has also given rise to new areas of opportunity. Data usage is growing exponentially with Asia Pacific’s data centre services market size set to outpace Europe’s by 20214.

With all this in mind we believe the need to be selective as well as active management has never mattered more.

Note: The Rolling Acres Mall Opened 1975, closed December 2013.



Source:

1 FTSE/EPRA NAREIT March 2018

2 FTSE/EPRA NAREIT Developed Index. 28 February 2018

3 Singapore Business Review report, citing BMI Research December 2017

4 PWC report January 2017



Janus Henderson Horizon Asia-Pacific Property Equities Fund

Tim Gibson
  • High conviction, multi-cap approach to capture opportunities in large stocks, as well as seeking value in small and midcaps.
  • Janus Henderson has managed direct property assets since the 1960s, and has built a successful track record in global property equity funds since 1997.
  • Regional managers and analysts based in Europe, Asia and North America provide valuable local expertise.




Japan
Japan Opportunities

Overview

  • Japanese equities are priced attractively with many trading on 9 to 10 times price earnings ratio1, and should hold up well against any blips or turbulence similar to what we experienced earlier in the year.
  • Abenomics saw vast amounts of public funds being plowed into corporates via ETF buying. Among the benefits of this have been vastly improved levels of corporate governance among Japanese companies. Japanese dividends paid in the entire 2017 rose to $70.0bn, an increase of 11.8% on an underlying basis from the year before. We expect this trend to continue broadly into 20182.
  • We are expecting 10-15% in index performance from Japan, which is slightly better than our expectations from other global markets. As we alluded to earlier, this is because there is a valuation gap between Japan and other developed markets, and there is room to catch up.

Rosy outlook for stocks

The first quarter of 2018 was marked by unexpected global market turbulence which sent ripples through much of the global community.

Global stock markets opened strongly at the start of the year and had climbed at quite sharply before dumping almost all its accumulated gains. Media dubbed this sudden drop as a great ‘sell-off’, but we viewed it as a correction and were not too worried. We would have been more concerned if the steep, upward trajectory had continued unchecked at its original pace and scale. The relatively inexpensive valuations of most equities had also led us to take a more sanguine view of the so-called ‘sell-off’.

Read more  >

Japanese equities, in particular, appear to be priced attractively compared to other developed market stocks, and should hold up well against any blips or turbulence similar to what we experienced earlier in the year.

Source: GS Quantum, Factset, GS Global ECS Research calculations. As at 18 January 2018
Notes: Japanese universe is TSE1. US universe is S&P500. European universe is GS covered firms which are part of Euro Stoxx 600 (excluding financials). EV/Sales and EV/EBITDA excludes financials. P/E for US is based on GS Global ECS Research operating EPS forecasts, and P/E for Europe is on a pre-amortization basis. Asia excluding Japan universe is MSCI US$ basis market index (local currency) and is based on FactSet and I/B/E/S estimates. Please note the above is based on forecasts, not real data.


Taking a 12-month view, we expect Japanese equities to do well. In our view, January’s corrections should then have provided a good entry point for those who weren’t exposed to the stock market, and were looking for a good time to start.

Picking and choosing

As an active investor, we tend to look at individual stocks and judge them on their own merits. However, we do occasionally identify interesting thematic ideas.

For example, we took an overweight position in Japanese banks. As far as we know, we were one of a few managers to take a meaningful overweight position in the area.

As an active investor, we tend to look at individual stocks and judge them on their own merits."

The prevailing notion then was that lending margins for Japanese banks would continue to languish, but we believed that an inflationary environment could end this trend and cause margins to increase as financial market discounts inflation expectation.

Additionally, we believed that Japanese banks would be able to easily meet upcoming minimum capital requirements set by the Bank of International Settlements. Our expectation was that this would likely result in these banks returning capital to their investors via dividends or a share buyback.

Japanese stocks are already priced quite attractively, with many trading on 9 to 10 times price earnings ratio. We believe higher prices, attractive valuations, together with expectations for a reasonable dividend payout, makes Japanese banks a sector worthy of consideration.

Actively managed

Beyond the thematic, we are, at heart, an active investor. As such, we mainly focus on individual stocks and judge them on their own merits. For our strategy, we also try to seek value in transformational changes because they are idiosyncratic in nature and are only gradually discounted in share price.

For instance, we previously took a position in a HR and marketing service company . The company had realised early on that its traditional business model was under threat by transactions being moved online. In response, it invested in a US internet start-up in 2012.

We realised then that the competitiveness of this business model was not well-understood by the market. The company subsequently experienced outsized topline growth which saw the market reassess the stock and eventually its value more than doubled.

The key point to note is that almost all the growth was derived from the market understanding of the acquired business’ value. The acquisition was indeed the transformational deal for this company.

The big payback

Indeed, recent times have seen a marked improvement in the way Japanese companies treat their shareholders. Part of the reason for this is how reform ushered in by Abenomics saw vast amounts of public funds being plowed into corporates via ETF buying by the Bank of Japan and the national pension fund. Compared to pre-Abenomic periods, much of the capital currently flowing within the Nikkei and TOPIX now comprise public funds, hence government involvement in pushing for better corporate governance among Japanese companies.

Among the benefits of this have been vastly improved levels of corporate governance among Japanese companies.

According to edition 17 of the Janus Henderson Global Dividend Index, which tracks dividend payout trends among global corporates, Japanese dividends paid in the entire 2017 rose 8.1% to $70.0bn, an increase of 11.8% on an underlying basis once the weaker yen was factored in.

We expect these trends to continue broadly into 2018 and beyond. Generally speaking, we expect the improving relationship between Japanese corporates and investors, set in motion by Abenomics, will continue to take place in spite of any leadership change since the policies have been working well thus far.

Currency risk cuts both ways

In terms of risk, a shock in the currency movement, where there is a steep appreciation of the yen, could hurt exporters and disrupt the Japanese market’s momentum. However, the scenario would be positive for domestic business franchises such as Japanese banks as market seems to have undervalued cashflow sourced domestically. In the end, this comes back to the BOJ and its policies. They clearly monitor the exchange rate when considering monetary policy. We think the possibility of that particular risk scenario is lower now than when compared to previous times, although government instability may cause some uncertainty with regards to monetary policy and exchange rate controls.

Looking ahead

We don’t expect a rapidly rising market like the fourth quarter of 2017 or more of what we experienced in January 2018. In that scenario, the market was willing to pay anything for thematic growth, thus, factors like strong fundamentals, management quality or valuation were not being considered.

Since then, we believe discipline has returned to the market and paying attention to very important factors like management quality, valuations, would be important.

We are expecting 10-15% in index performance from Japan, which is slightly better than our expectations from other global markets. As we alluded to earlier, this is because there is a valuation gap between Japan and other developed markets, and there is room to catch up.

In summary, Japan has the potential to outperform other markets, but one shouldn’t expect drastic levels of returns similar to what was experienced in early January, rather, more modest numbers are reasonable to expect.

Stock selection will be key as is attention to valuation and the management quality of companies. Based on these criteria, we will endeavour to deliver a decent return on assets for our clients.



Source:
1. Bloomberg, March 2018
2. Janus Henderson Investors, as at December 2017



Janus Henderson Horizon Japan Opportunities Fund

Japanese Equity Team
  • Highly concentrated portfolio reflects the managers’ best ideas. These stocks are selected by leveraging the Japan equities team’s extensive research process together with shared insight from other Janus Henderson investment teams.
  • Janus Henderson has run Japanese equity funds since 1974. The Japanese equities team, combined, boasts more than half a century of experience of researching and managing Japanese stocks.
  • An unconstrained portfolio in terms of company size and sector. Focus is on medium term earnings forecasts with a strict valuation discipline to identify undervalued opportunities.




Japanese Smaller Companies

Overview

  • Japanese companies are fundamentally improving. Unlike previously, when corporate earnings were mainly driven by the weakening yen, Japan’s current phase of earnings growth is being driven largely by internal factors such as growing private capital expenditure and domestic consumption.
  • We have a positive view on consumption recovery as the current labour shortage is likely to drive wages growth, while continuing stimulative monetary policy should support domestic consumption, drive higher investment activity and bring an end to deflation.
  • Japanese smaller companies tend to be more domestically focused and, in that respect, are generally more protected from external macroeconomic ripples, smaller companies also stand to gain more from a domestic recovery in corporate capital expenditure and domestic consumption than larger companies.

Japanese stocks: more favourable fundamentals

The fundamentals of Japanese companies have seen significant improvements over recent years. Unlike the period from 2012 to 2015, when corporate earnings were mainly driven by the weakening yen, Japan’s current phase of earnings growth is being driven largely by internal factors, such as growing private capital expenditure and domestic consumption. As a result, market sentiment towards Japanese equities has been more positive and, despite the fact that the market has soared to a 26-year high and its value has more than doubled over the last five years, the current price-to-earnings (P/E) ratio of 15 times is reasonably attractive, particularly on a longer term historical view (chart 1).

Read more  >

Source: Bloomberg, Janus Henderson Investors. Nikkei 225 Index monthly data from 31 December 1980 to 28 February 2018. Yields may vary and are not guaranteed, past performance is not a guide to future performance.

Monetary policy still providing a boost

Supportive to our generally bullish view of the Japanese stock market this year is our expectation that the Bank of Japan is unlikely to follow in the footsteps of the US and Europe and begin winding down quantitative easing anytime soon. Instead, we think that any central bank policy change may only happen after 2018 because current core consumer inflation at 1.4% year-on-year is still below the central bank’s target of 2%.

Progressive and progressing corporate culture

A key tenet of the fund is that we focus on companies that are improving corporate governance standards and rewarding shareholders. We continue to see a significant positive shift in corporate culture since Prime Minister Shinzo Abe’s introduction of the corporate governance code in 2015 and expect this to continue despite any leadership change. Meanwhile, corporate reform is being boosted by the increasingly large cash piles of Japanese companies (see chart 2); indeed this is providing ample opportunities for shareholders to benefit from rising dividend payments and share buybacks.

Source: Company Data, Goldman Sachs Global ECS Research, as at 29 August 2016.
Note: Based on 1,787 Tokyo Stock Exchange 1st section (TSE1) companies, excluding consolidated subsidiaries, for which consolidated financial data are consistently available from financial year 2010.

Source: Bloomberg, Janus Henderson Investors.
Market cap is as at 31 December 2017.

The investment case for Japanese smaller companies

The reasons for investing in Japanese smaller companies remain compelling in our view. These companies tend to be more domestically focused and, in that respect, are generally more protected from external macroeconomic ripples compared to their larger, more globally-exposed counterparts. Smaller companies also stand to gain more from a domestic recovery in corporate capital expenditure and domestic consumption than larger companies.

Smaller firms by nature continue to be under-researched by investment analysts making the potential to uncover undiscovered ‘gems’ very strong and potentially more rewarding. We believe a fundamental, bottom-up, research-driven investment approach focusing on stock valuation, investment catalysts and structural growth, is key to finding the most attractive opportunities in Japanese smaller companies.

Smaller firms by nature continue to be under-researched by investment analysts making the potential to uncover undiscovered ‘gems’ very strong and potentially more rewarding."

According to Nomura research, operating profits of smaller companies rose by 4.0% year-on-year in the 2016 financial year and this is expected to rise to 8.0% in 2017, and 10.2% in 20181. In tandem, earnings growth for these companies is also expected to accelerate.

Risks and positioning

A caveat to our positive view on smaller companies is that if the yen were to weaken, this could lead to the outperformance of more globally-exposed larger companies at the expense of largely domestic-focused small caps. Another risk to be mindful of is that while Japan’s consumer price index has remained positive for more than a year now, the pace of economic recovery is moderate and there is always a risk of a return to deflation, which would impact the stock market.

We have a positive view on consumption recovery as the current labour shortage is likely to drive wages growth, while continuing stimulative monetary policy should support domestic consumption, drive higher investment activity and bring an end to deflation.

Upbeat outlook

Overall, we think Japanese equities could potentially deliver an attractive return for investors this year, as well as strong corporate earnings growth. More promisingly, for smaller companies and our strategy, double-digit profit growth is anticipated for small caps in financial years 2017 and 2018. Of course, there are risks to be mindful of, as noted above, but the supportive trend of improving fundamentals of Japanese companies provide, in our view, strong reasons to be positive.



Source: 1. Nomura, earnings estimates by Nomura are supplemented by Toyo Keizai as at 24 January 2018. Estimates may vary and are not guaranteed.



Janus Henderson Horizon Japanese Smaller Companies Fund

Yunyoung Lee
  • Concentrated portfolio with integrated risk control and liquidity management.
  • Style neutral and focuses on stock valuation, catalyst and/or structural growth.
  • The fund invests in stock that fall within the bottom 25% of the Japanese equity market in terms of market capitalization.




Contact

Hur-Ming Wong

Director, Head of Wholesale Distribution (Southeast Asia) and Global Financial Institutions (Asia)

(65) 6836 3913

ming.wong@janushenderson.com








Insights




Important information

This website is for financial promotion purposes and is not investment advice.

Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and you may lose the amount originally invested.

Janus Henderson Horizon Fund (the "Fund”) is an open ended investment company incorporated in Luxembourg as a société d'investissement à capital variable ("SICAV") on 30 May 1985. Investors are warned that they should only make their investments based on the most recent offering documents which contain(s) information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements. Shares, if redeemed, may be worth more or less than their original cost.

Investors are advised to consult your intermediary who will give you advice on the product suitability and help you determine how your investment would be consistent with your own investment objectives. The investment decisions are yours and an investment in the Fund may not be suitable for everyone. If in doubt, please contact your intermediary for clarification.

The content herein is produced for information, illustration or discussion purposes only and does not constitute an advertisement or investment advice or an offer to sell, buy or a recommendation for securities in any jurisdiction and do not purport to represent or warrant the outcome of any investment strategy, program or product, other than pursuant to an agreement in compliance with applicable laws, rules and regulations. Not all products or services are available in all jurisdictions. Investment involves risk. Past performance cannot guarantee future results.

Janus Henderson Investors is not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not make any warranties with regards to the results obtained from its use. It is not intended to indicate or imply that current or past results are indicative of future profitability or expectations. In preparing this document, Janus Henderson Investors has reasonable belief to rely upon the accuracy and completeness of all information available from public sources. Unless otherwise indicated, the source for all data is Janus Henderson Investors.

This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

The Singapore Representative of the Janus Henderson Horizon Fund (the “Fund”) is Henderson Global Investors (Singapore) Limited and is distributed by authorised distributors. The prospectus and Product Highlights Sheet of the Fund is available and may be obtained from the Singapore Representative’s office and the authorised distributors’ offices.

The fund may intend to use or invest in financial derivative instruments.

Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its use.

Developing markets carry risks as well as rewards. Investing in foreign securities involves additional risks including exchange rate changes, political and economic upheaval, the relative lack of information, relatively low market liquidity, the potential lack of strict financial and accounting controls and standards, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation. These risks are magnified in developing markets, which have historically been subject to significant gains and/or losses, and as such, absolute returns may be subject to increased volatility.

Effective 15 December 2017, Janus Henderson Horizon Asian Growth Fund formerly known as Henderson Horizon Asian Growth Fund; Janus Henderson Horizon Asian Dividend Income Fund formerly known as Henderson Horizon Asian Dividend Income Fund; Janus Henderson Horizon China Fund formerly known as Henderson Horizon China Fund; Janus Henderson Horizon Asia-Pacific Property Equities Fund formerly known as Henderson Horizon Asia-Pacific Property Equities Fund; Janus Henderson Horizon Japan Opportunities Fund formerly known as Henderson Horizon Japan Opportunities Fund; Janus Henderson Horizon Japanese Smaller Companies Fund formerly known as Henderson Horizon Japanese Smaller Companies Fund.

Important message