The bears are "sharpening their knives" for Japan despite encouraging signs in the longer term, the managers of the Ruffer investment trust have warned.
Hamish Baillie and Steve Russell said the country is once again “unloved”, with disappointing economic data - such as flat retail sales in July - boosting the bears' case.
But while the managers reduced their exposure to 15% in the first quarter of 2014, they said the dust from the sales tax increase is now settling. In addition, the Bank of Japan governor is ready to use further stimulus if required, leaving the pair happy to maintain their exposure.
They told investors: “Our window into corporate Japan suggests that at a ground level companies are still on the front foot and earnings revisions are likely to be upwards rather than downwards.”
In the second quarter a fifth of companies beat earnings estimates by more than 5%, they added.
"There had already been downward revisions to allow for the sales tax impact and these look overdone. We also saw further encouraging signs of wage growth in the second quarter - a key part of Abe's jigsaw of structural economic reform," they said.
The duo also highlighted the correlation of rising asset classes in August: “The performance during August owed much to the removal of headwinds that have been holding us back in recent months.
“If such correlation persists then it will require closer investigation but a single month is too short a time period on which to make judgements.”
The trust, which is 28% exposed to the dollar, benefited from a strengthened US greenback over July. Long dated index-linked bonds were also significant contributors, along with Western equities, gold and options.
In total, the trust climbed 1.9% in the last month, versus a FTSE All Share gain of 2.2%, with its Japanese equity exposure keeping a lid on gains.
