Investment trusts poised should Asia rebound

The rules of our investment trust 10 stock portfolio, which we select from our value and momentum combined ranking screen, are that there should be no more than five niche trusts in total and no more than two trusts with the same niche.  This month, as our raw list of top 25 trusts shows, we had to leave several Japanese fund ideas on the cutting room floor. 

Along with the lingering effects of the pandemic, which affect most countries in the region, Japan has experienced a shocking drama with the murder of its former prime minister, Shinzo Abe. That tragedy isn’t material for financial markets but, more generally, there has been a sense of malaise. 

Normally, the yen is seen as a haven but Japan’s currency has been cheap, which is perhaps an opportunity. If the economy rebounds post-Covid and the currency recovers, too, it could be a positive double whammy for foreign investors. However, there are downside risks: Japan is very energy dependent, so the costs of importing energy, particularly oil (which is priced in dollars so more expensive when the yen is weak) could remain a drag. Then there are the long-term demographic challenges associated with having one of the world’s oldest populations. 

India, on the other hand, has plenty of young people. Again, we had to leave out ideas that ranked in our top 25 because we also hit our limit of five niche funds in total for the 10 stock portfolio. Still, the Asian generalists in our 10 stock portfolio are exposed to India. In general, emerging economies are hurt by the strong dollar and, again, India’s Achilles’ Heel is energy. 

Finally, another theme that had to be left out of the 10 stock portfolio because of the niche rules, is trusts that invest in debt instruments. This has been something of a boom area over the past two years and with income often linked to the performance of secured floating rate loans, this has been an asset class which has some inflation-hedging potential. But there are risks: should central banks rein in inflation by tipping the global economy into recession, there will be a markedly greater likelihood of loans defaulting and the value of loan collateral being written down.