By Scott McGlashan is manager of the Close Finsbury Japanese Equity Fund Investors have treated ...
By Scott McGlashan is manager of the Close Finsbury Japanese Equity Fund
Investors have treated the recent rally in the Japan with scepticism. An obvious attempt has been made by the authorities to push the market higher for a good close at the end of the fiscal year on 31 March and it is widely assumed the market will fall away once this manipulation has finished. However, any setback to share prices will be temporary.
The world economy, led by the US, is recovering more rapidly than expected. The historic correlations between global economic recovery, Japanese industrial production and the Japanese stock market have been high. Moreover, there is evidence that deflationary pressures, both internationally and domestically, are easing. The combination of higher sales volumes and stable prices will have a dramatic positive impact on corporate profits.
Restructuring is continuing to strengthen corporate Japan. While perhaps as many as 20% of listed companies are in trouble and could disappear over the next few years, the average company has been generating positive cashflow and paying down debt for the past five years.
Balance sheets are stronger now than they have been for many years. Even so, share price valuations are cheap. Approximately a third of listed companies have net cash on their balance sheets but trade at below book per share. Ungeared companies are trading below liquidation values, which is virtually unprecedented in modern stock market history.
The events of 11 September have seen the reversal of a decade-long decline in US defence expenditure. The four great Japanese bull markets of the 20th century were all associated with such a change of US policy ' WWI, the Korean War, Vietnam and Ronald Reagan. WWII did not have such a favourable impact on share prices because Japan made the mistake of being a participant rather than just a supplier.
The banking crisis is heading to its final resolution after a decade. Much of the banking system is now insolvent and it is likely one of the major banks will collapse in the weeks to come.
The response of the authorities will, by necessity, be to nationalise many of the problem loans that are weighing down the banks and to flood the banking system with liquidity.
Bull markets are born in banking crises. In August 1982, the eight largest banks in the US were threatened with insolvency as a result of their loans to Latin America. The response of the Fed in guaranteeing their survival and at the same time injecting masses of liquidity into the financial system set off a bull market that ran until the first quarter of 2000.
In 1974, when the Secondary Banking Crisis threatened NatWest with collapse, the action of the Bank of England in publicly launching a banking lifeboat and privately stating there would be no set of circumstances in which the bank would be allowed to fail triggered off a stock market rally that saw stock prices double in 12 months.
On any measure other than dividend yield, stocks in Tokyo today are cheaper than they were in London in December 1974. Investors who hesitate are likely to miss the best buying opportunity international capital markets are likely to provide for many years to come.
Stocks looking attractively cheap.
Bull markets are born in banking crises.
World economy recovering rapidly.
Much of the banking system now insolvent.
One major bank will collapse in weeks.
Recent rally treated with scepticism.
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Total of 72 accredited firms
23% fall since Q1
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