A correction in Japanese equities is giving the more optimistic investor a second buying opportunity...
A correction in Japanese equities is giving the more optimistic investor a second buying opportunity, according to JP Morgan Fleming.
The market had rallied quite sharply since the February low, but has now joined the current stock market correction triggered by a valuation contraction in US equities and the accounting scandal with WorldCom.
However, the falling of the Topix below 1,000 is a buying opportunity, says Stephen Mitchell, head of the Japan portfolio group at JP Morgan Fleming Asset Management.
Big value-oriented investors have consistently become more aggressive buyers of Japanese equities at 950-1000 on Topix and fundamentals are now better than they were in the aftermath of 11 September, Mitchell says.
He believes optimism about corporate earnings and share buy backs that was prevalent during March to May is justified.
Nomura Securities, Japan's largest brokerage house, has recently upgraded its earnings outlook for Japanese companies in their NR1400 universe by 10%. Their Revision Index ' number of upward revisions minus number of downward revisions ' swung back into positive territory in June, with an especially large swing for manufacturing.
Meanwhile, Asian GDP growth and intra regional trade has picked up with exports from China noticeably buoyant. Exports from Japan have also remained strong, hitting a record high in May.
Mitchell says: 'If we can be confident about the US economy ticking along at a modest 2% GDP rate going through the second half of 2002 and into 2003, then Japanese exporters will do OK. Current valuations are discounting something worse than this.
The growth in Japanese exports is coming from demand in Asia and China, not the US. China is noticeably sucking in more imports as consumer demand growths as Foreign Direct Investment creates jobs.'
In terms of valuations, many of the blue-chip yen sensitive exporters are trading at remarkably low valuations, he says. Fuji Photo, for example, is trading at book value. Honda is on 11 times P/E ratio, while Toyota is on 13 times, Konica is on 19 times and Canon is on 22 times.
Slightly smaller quality names are also inexpensive. Yamaha Motor and Fuji Heavy (Subaru) are both trading on 10 times next year's earnings, for example.
Although generally positive, there has been one disappointment in that politicians have recently missed the opportunity to introduce tax cuts, Mitchell says.
Japanese fund manager at Henderson Global Investors, Jeremy Hall, says although structural problems with Japan have not gone away, they are less pressing while the economy is recovering.
He is confident that at the micro level Japanese companies have been cutting costs and therefore corporate profits are likely to surprise on the upside. 'The impact of cost cutting, combined with the depressed base from where profits are recovering, should lead to some impressive-looking year-on-year profit gains this fiscal year,' he says.
Valuations are proving cheap.
Exports are picking up.
Signs of corporate restructuring.
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