Japan's investment promise
At the end of last year traders in the Japanese market were beside themselves with joy. After years of falling prices and a seemingly endless recession, things had finally come good Every economic number announced seemed to be coming in ahead of expectations and companies across the country were restructuring their operations, cutting costs and showing nice jumps in profits as a consequence. The result? The benchmark Nikkei index ended 2005 40% higher than it did 2004 and the city’s strategists all forecast another stormer of a year in 2006, as did I. Sadly so far we have all been completely wrong. While America’s Dow Jones and our own FTSE 100 are both up in 2006 (+6.2% and +5.3% respectively) the Nikkei has managed a mere 0.3%. What’s gone wrong? When spring came, Japan’s companies started to revise down their profit forecasts for 2006. By April, instead of double-digit profit growth, the market was looking at an increase of only 3.1%. Disappointed with that, foreign investors stopped buying into the market. The situation hasn’t been helped by worries over the coming prime ministerial elections in September. Junichiro Koizumi has been a well-liked, reforming influence in Japan and not many think his likely replacement (current chief cabinet secretary Shinzo Abe) will be able to match his popularity. However, none of this makes the Japanese market a bad bet. Personality politics are unlikely to have much effect on it over the long term; the Japanese economy is in pretty good shape (as the Bank of Japan’s recent interest rise suggests); and the corporate situation, while not as good as last year’s bulls would have liked, is not actually in any way bad. In fact Japanese companies are in great shape.
Helped by the super low interest rates of recent years, they’ve cut their debts and now have the kind of solid balance sheets that mean they can react fast to any pick-up in economic activity. Even better, many of the old industrial firms that characterise the Japanese market but have been ignored for decades (steel companies for example) are back in vogue thanks to the worldwide commodity boom. The year hasn’t been good to the market so far, but there is every reason to expect that to change before 2007 rolls around.
So where should you be putting your money? Steer clear of the smaller, riskier stocks that did so well last year and instead search for value in the larger, duller stocks the market tends to overlook, such as electrical giant Hitachi, which is currently trading at less than the value of its assets, or Japan Tobacco which is doing well out of rising cigarette prices and its exposure to the millions of Chinese smokers. Fund investors might look to the Framlington Japan fund, which holds this kind of stock and, reassuringly, is run by managers with decades of experience in the Japanese market.
Written by Merryn Somerset Webb, Editor of MoneyWeek. Her views are personal and investors should always seek professional advice - Read her article every month in Saga magazine.
This article was created: 16 November 2006.
This article was last edited: 18 April 2007.
 Email  Back to top
|
