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Make your mind up time – Japan
THE turbulence on the Tokyo stock market this week will have fuelled fears that the recent rise in Japanese shares was another false dawn. Many investors have long since given up hope, but that is a shame, for the doubters have missed an opportunity to make some handsome gains.
Since the market turned in April 2003, the Nikkei 225 index of leading shares has more than doubled, showing a rise of 40 per cent in 2005 alone.
Had you been aboard the JPMorgan Fleming Japanese Investment Trust over the past 12 months you would have done even better. Its 74 per cent return places it among the best-performing funds available to UK investors.
Stephen Mitchell, the fund’s manager, thinks that this week’s share price falls were a correction rather than a cyclical decline. “There have been three or four false dawns since 1990,” he says. “We have had short cycles based on exports which always petered out because the domestic economy didn’t pick up. This time the economy is picking up.”
He points to a number of reasons for this economic strength, one being that the car industry is robust again. That is having a “trickle-down effect” on other parts of Japanese industry, he says.
The boom in China is a big help, too. Japan is providing turbines for power stations, rolling stock for railways, cranes for shipyards and even the ships themselves. “Japan kept alive all those 1970s industries, such as steel and shipbuilding,” Mr Mitchell says. “They are getting orders that I haven’t seen for 25 years.”
New business is also coming from oil-exporting countries in the Middle East, Venezuela and others whose coffers have been refilled by the soaring price of oil.
But what is really different this time is the return of free- spending Japanese consumers. Anais Faraj, of Nomura, the Japanese investment bank, says that there is the first real revival in confidence since the Japanese market peaked in 1989. Mr Faraj says: “Since the bursting of the (stock market) bubble, a whole generation, between the ages of 30 and 50, have not bought a house and have not been spending because of deflation and fears over their jobs. They are now spending again.”
And that is only one side of the coin. Magnus Spence, of Dalton Strategic, the group whose Melchior Japan Opportunities Fund was the top- performing investment fund last year, points to the untapped assets of Japanese savers. “About 55 per cent of savings are in cash assets rather than equities, so a very small change in perceptions could lead to an avalanche of money back into the stock market,” he says.
Mr Faraj adds: “We are looking for the market to take a breather this year. Fund managers who have come to it late are talking about exponential growth, but it is very difficult to find companies that are undervalued.”
Edwin Merner, manager of the Atlantis Japan Growth Fund, which has one of the best long-term performances, agrees that the market will quickly pick up the slack after any correction. “We expect corporate earnings to expand for several years and valuations look reasonable,” he says.
Even Mr Faraj acknowledges that if the Bank of Japan, fails to raise interest rates this year as expected, the Nikkei could soar to 20,000 from its present level of below 17,000.
So investors should climb aboard Japan for the medium term. Mark Dampier, of Hargreaves Lansdown, the investment adviser, says: “I am not bearish. This week’s correction could present a buying opportunity.”
Mark Atherton
Heat clouds judgment
UNTIL this week it seemed that the whole world was bullish about Japan. To express doubts about the upward rise of the Tokyo stock market was seen as akin to parading outside Stamford Bridge with a banner saying that Chelsea will not win the Premiership this season.
But some market experts have been prepared to think the unthinkable. Jim Wood-Smith, of Christows, the stockbroker, says: “The world wants to believe that Japan is finally pulling out of its decade of recession. The likelihood is that the diagnosis is correct. The problem is that the bandwagon has such a head of steam that even the smallest sliver of badly sliced puffa fish in the driver’s sushi could cause a very nasty bump.”
Marcel Porcheron, a research analyst at Bestinvest, the independent adviser, says that Japanese equities look expensive against those in Europe and the US. Japanese stocks stand on a prospective price-earnings ratio — a key valuation measure — of 17.5, while US stocks are at 16.8 and European stocks at
13.1. “Japanese companies will have to deliver rapid increases in earnings to justify their high valuations, and there are other signs that the market may not follow the optimists’ script.”
These include a strengthening of the yen against the dollar, which will hit exporters and fuel worries about deflation and fears that the Bank of Japan could raise interest rates prematurely, killing off flickering consumer recovery.
Last year’s rise in the stock market was driven almost exclusively by foreigners, says Simon Ward, an investment strategist at New Star Asset Management. He says that there is little sign of domestic institutions taking up the baton, with commercial banks and insurance companies still net sellers of Japanese stocks.
He expected the market to pause for breath as it digested the share issues launched on the back of the recent rise. “It went up 40 per cent last year. It is not often that a main market repeats that sort of performance the following year.”
Some fund managers who are fairly positive about Japan still limit their exposure. Hugh Young, who heads Aberdeen Asset Management’s Asia team, says that Japan makes up 25 per cent of its Asian funds, but this is significantly below Japan’s 60 per cent share of the regional benchmark index. He says: “Japanese companies are better run now, but we see equally attractive opportunities in the rest of Asia. In many cases this is coupled with higher growth.
“We recognise that Japan is taking steps to reform its economy, but watching the progress is like watching paint dry. It’s happening, but very slowly. Other concerns include escalating raw material prices, the high oil price and a spiralling debt burden.”
Mark Atherton:
UNTIL this week it seemed that the whole world was bullish about Japan. To express doubts about the upward rise of the Tokyo stock market was seen as akin to parading outside Stamford Bridge with a banner saying that Chelsea will not win the Premiership this season.
But some market experts have been prepared to think the unthinkable. Jim Wood-Smith, of Christows, the stockbroker, says: “The world wants to believe that Japan is finally pulling out of its decade of recession. The likelihood is that the diagnosis is correct. The problem is that the bandwagon has such a head of steam that even the smallest sliver of badly sliced puffa fish in the driver’s sushi could cause a very nasty bump.”
Marcel Porcheron, a research analyst at Bestinvest, the independent adviser, says that Japanese equities look expensive against those in Europe and the US. Japanese stocks stand on a prospective price-earnings ratio — a key valuation measure — of 17.5, while US stocks are at 16.8 and European stocks at
13.1. “Japanese companies will have to deliver rapid increases in earnings to justify their high valuations, and there are other signs that the market may not follow the optimists’ script.”
These include a strengthening of the yen against the dollar, which will hit exporters and fuel worries about deflation and fears that the Bank of Japan could raise interest rates prematurely, killing off flickering consumer recovery.
Last year’s rise in the stock market was driven almost exclusively by foreigners, says Simon Ward, an investment strategist at New Star Asset Management. He says that there is little sign of domestic institutions taking up the baton, with commercial banks and insurance companies still net sellers of Japanese stocks.
He expected the market to pause for breath as it digested the share issues launched on the back of the recent rise. “It went up 40 per cent last year. It is not often that a main market repeats that sort of performance the following year.”
Some fund managers who are fairly positive about Japan still limit their exposure. Hugh Young, who heads Aberdeen Asset Management’s Asia team, says that Japan makes up 25 per cent of its Asian funds, but this is significantly below Japan’s 60 per cent share of the regional benchmark index. He says: “Japanese companies are better run now, but we see equally attractive opportunities in the rest of Asia. In many cases this is coupled with higher growth.
“We recognise that Japan is taking steps to reform its economy, but watching the progress is like watching paint dry. It’s happening, but very slowly. Other concerns include escalating raw material prices, the high oil price and a spiralling debt burden.”
For more investment articles visit www.timesonline.co.uk/invest