As Japan moves into the Typhoon Season, the outlook for the stock market becomes even cloudier. At f...
As Japan moves into the Typhoon Season, the outlook for the stock market becomes even cloudier. At first glance, exogenous factors such as the weakness of the euro, high oil prices and US volatility seem to provide an unstable foundation for Japanese equities. However, we believe that investors have exaggerated the scale of these adverse influences and an opportunity for fruitful investment exists.
Firstly, Japanese exporters have underestimated the fall in the euro but they have also misjudged the strength of the US dollar. The outcome for a Japanese company's profits is generally more neutral.
Secondly, higher oil prices will exert upward pressure on inflation but the effect is far more muted through a policy of taxing volumes, not prices, and by the relative strength of the yen.
Thirdly, the high valuations of technology stocks comprising Nasdaq have been widely reported, but most Japanese technology stocks neither trade at such heady valuations nor are they as exposed to the vicissitudes of the semiconductor market as in previous cycles.
We expect to see improvement in the domestic investment environment for Japanese equities this quarter. Major concerns arising in the third quarter of 2000 have now been laid to rest. Although the stock market was visibly shaken by the Bank of Japan's decision to abandon its zero interest rate policy, subsequent economic indicators and comments by government officials do not imply a further tightening of monetary policy.
We expect private capital expenditure and private consumption to provide further impetus to the recovering economy, supported by rising corporate profits and incomes.
Estimates of corporate earnings have been revised and we expect consolidated recurring profit growth for non-financial companies to exceed 25% in fiscal 2000 (ending March 2001).
This improvement in consolidated corporate profits is not only driven by a cyclical recovery in sales but also by ongoing restructuring and actions taken by companies in previous years. We expect the equity supply-demand balance to ameliorate in the coming quarter.
Stock selection in the current Japanese stock market is of critical importance. Strategies that advocate the accumulation of value stocks or growth stocks are neglecting major changes undertaken by Japan's corporate management. The challenge is to look not only at growth stocks but also at companies adapting their business models to handle an adverse operating hardship environment. A focused management style is essential to ultimately deliver rewards to shareholders in the form of improving return on equity.
Companies that fulfil these criteria include Hitachi, MEI, Sony, and Fujitsu in the electronics sector and Takeda Chemical, Asahi Glass, Nippon Comsys and Toyota in other sectors.
Keith Edwards is senior portfolio manager at American Express Asset Management
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