Japan - to buy or not to buy?
By Meera Patel | 23 May, 2008
It seems that Japan is one of those markets that has bursts of strong performance followed by prolonged weakness. It’s no wonder that some investors lose patience, but for those who stick to their guns, their patience could be well rewarded.
In April, the Japanese sector was ranking amongst the top performing global sectors. This is of course a very short time frame, but having been in communication with various fund managers recently, they are all singing from the same hymn sheet. They feel there is an excellent buying opportunity in Japan and the market could finally be turning a corner.
We’ve all heard this before. According to Stephen Harker who manages the SG Japan CoreAlpha Fund, Japanese equities are the most attractively valued for 25 years. Japanese equities are currently yielding more than bonds – this has only happened twice before in 1998 and 2003. When this happened, this was followed by a rally in the market.
Other fund managers like Scott McGlashan who manages the JOHCM Japan Fund has been saying for a number of months that he is extremely positive for the prospects of Japan. Many people argue that the demographic structure is something that disadvantages Japan from other economies. Scott McGlashan argues that a shrinking working population is not confined to Japan, but many European economies, Russia and China, so does that make them poor investment areas?
Similarly, David Mitchinson who runs the JPM Japan Fund argues that valuations and other measures strongly suggests it could be a buying opportunity for many shares, yet at the same time profits are substantially higher in Japan compared to five years ago.
Unlike other developed markets, Japan is not facing an enormous financial crisis. The vast majority of Japanese banks have been relatively immune from the credit crisis. According to Stephen Harker, Japanese banks went through their own problems between 1992 and 2003. They have already learnt from their mistakes and have not been as deeply involved in the credit crunch. In his own words, “Japan has been cleaned out and cleaned up” and he thinks the corporate sector is looking solid.
Investing in Japan does not come without risk. While the strong yen has been beneficial for investors, it can work the other way. It can also be detrimental for exporters. Additionally, a weaker global economy would also have an adverse impact on overall economic growth in Japan. We have also seen many false dawns before which haven’t come to anything.
That said, there are many factors that support Japan as an attractive investment proposition. Some of these fund managers are positioning their portfolios away from defensive businesses like utilities and railway companies into more economically sensitive areas like technology. Some portfolios are therefore being more aggressively positioned for a market rally and if these fund managers are right in their views, investors are well placed to benefit.
