The budding confidence with which equity fund managers in Japan started 2020 has evaporated in the wake of the coronavirus pandemic, which has left the country’s fund industry in uncharted territory. For European retail investors looking to maintain exposure to Japanese equities regardless of the macroeconomic outlook for the country, the best approach may be to stay invested, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

Flows into Europe-domiciled Japanese equity funds have been negative over the past two years, but their assets under management (AUM) rose year-on-year in 2019. Nevertheless, in the final quarter of last year, economic growth in Japan was hit by both a hike in sales tax—the first increase in the levy in the five years—and the devastation wreaked by Typhoon Hagibis, says research from Cerulli Associates.

“Now fears are growing that the coronavirus outbreak could tip the world’s third-largest economy into recession,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli. “Managers are starting to lower their 2020 GDP estimate for Japan, citing lower than expected external demand and domestic consumption rising from the impact of coronavirus. As such, Japan could enter a recession,” he continues.

The Bank of Japan has announced a doubling of its purchase of exchange-traded funds (ETFs) to an annual pace of ¥12 trillion (US$109 billion) and Japanese real estate investment trusts to a rate of ¥180 billion. However, prior to the coronavirus outbreak, asset managers were warning that Japan’s central bank had exhausted its monetary policy options.

In light of the high level of volatility in global equity markets since the outbreak of the virus across the world, European investors interested in Japanese equity exposure could take a longer-term view, focusing on long-established large funds that have delivered outperformance for retail investors over several years.

Other Findings:

January was a positive month for Europe’s ETFs and index funds, with net inflows of €12.2 billion (US$13 billion) and €5.7 billion respectively. However, compared to December, the monthly inflows were 29% lower for ETFs and 55% lower for trackers. Equity and bonds within the ETF space were the best-selling asset classes, gathering some €6.5 billion and €3.9 billion respectively in net new money during January, but these inflows were significantly lower month-on-month.

After two consecutive positive months, Europe’s asset allocation sector posted net outflows of €382 million in January. Asset allocation alternatives recorded net outflows of €561.8 million, whereas asset allocation saw positive net inflows of €179.7 million. The sector's total AUM increased 0.4% to end the month at €629.5 billion. Many of the managers Cerulli interviewed in January had a positive outlook for the sector, with fund launches planned in 2020.