January saw stock markets in the Pacific ex-Japan region outperform Japan. This outperformance is li...
January saw stock markets in the Pacific ex-Japan region outperform Japan. This outperformance is likely to continue in the long run, for the same reasons that have contributed to the region outperforming both the UK and Japan over a long period.
Yet Japan is now possibly oversold and a short-term bounce in relative performance is possible. Having reached a 19-year low, investors should be wary of being too short.
In fundamental terms, the outlook for Japanese equities appears gloomy. The country has had a decade long on-off affair with recession, while the political solution of throwing money into infrastructure projects has created its own problem of a ballooning budget deficit.
The strength of the yen against the dollar is an additional problem, as is the 'muddle through' approach to the problem of bad corporate debt clogging up the banking system.
But historically low valuations do provide support for a rally on any positive surprises. Particularly as many stocks offer sound balance sheets, relative to their US peers, and have proven themselves to be survivors after years of slow economic growth.
What could trigger a rally? The authorities are expected to try to boost the market before the financial close on 3 March, as they have in previous years. This could coincide with a change in governorship at the Bank of Japan, which has often been a trigger for the stock market to rally.
JPMF's Japanese portfolios are focused on exporters, in anticipation of yen weakness, and on restructuring stocks because of the potential boost to shareholder returns even if the broader macroeconomic picture remains unhelpful. Banks are broadly underweight as their outlook is problematic as long as bad loans inhibit new lending.
Outside Japan, the region has performed well year to date, relative to other investment regions, thanks to what the Taiwanese press have called the 'China Harvest'.
Regional investors have begun focusing on companies that will benefit most from China's robust economic growth, from shipping stocks in Hong Kong and Taiwan to Korean steel exporters and mainland Chinese stocks. In 2002, Chinese GDP grew 8%, year-on-year, and is expected to grow by a similar amount this year.
Yet this is merely a new support to a long period of outperformance. After all, the FTSE Pacific ex-Japan region fell 4.7% in the five years to December 2002, in sterling terms, compared to a fall of 14.5% for the FTSE Japan index. Our own FTSE 100 index fell 13.1%.
The Pacific emerging stock markets offer attractive valuations, with many world-class companies on lower ratings than their Western counterparts despite having faster earnings growth. These offer investors a geared play on global growth and are fundamental reasons for investing in the region.
Meanwhile Australian resource stocks are likely to continue to benefit from the high gold price, and from current strong demand for base metals.
Our regional portfolios are overweight the 'China Harvest' stocks, as well as high-yielding stocks with stable and transparent cash generation.
By country, we are overweight Hong Kong and Korea. The portfolios are underweight China itself because of the difficulty of finding stocks to invest in directly, and underweight Indonesia and the Philippines. We are neutral Australia, Taiwan, Singapore and Thailand.
Short term bounce possible.
Many companies have sound balance sheets.
Emerging stocks offer geared play on growth.
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