By Jonathan McClure is a senior fund manager at Royal London Asset Management Investment is a ca...
By Jonathan McClure is a senior fund manager at Royal London Asset Management
Investment is a capricious business. Japan became the unlikely hero of the hour as, against expectations, the yen strengthened as the corporate picture in the US imploded and Japanese shares outperformed global markets handsomely.
But domestic equities have generally performed only in relative terms and, in reality, against a lukewarm domestic backdrop. Economic recovery has been dependent on a first quarter pick-up in exports and manufacturing data, but recently the global scene has slowed, led by the US and the American consumer.
In recent months, all equity markets have been victims of the extraordinary correlation between global trade flows and related industries' share prices. The US slowed, leading down highly correlated industries in the UK, Europe, Asia and Japan.
What started as a high tech bubble has radiated out to encompass export industries globally. This is just as true in Japan as anywhere else.
What is interesting has been the reaction. In July, just as the US and European markets reached a crescendo of depression, investors suddenly perceived value in these markets, switched out of Japan, which still lingers near an 18-year low, and reinvested in markets at a five-year low.
They swapped shareholdings in one economy for highly correlated ones in another; quite possibly to lose more money as the strong currency has been ignored and value in the domestic market is passed over.
It is hardly surprising it is difficult to make money in Japan from asset allocation.
In the 1980s, foreign investors ignored domestic shares almost entirely (and the strong yen) constantly yearning for technology opportunities and so-called internationally popular blue chips.
The Nikkei average rose to 39,000 but external demand stocks went nowhere. At the all-time high, foreigners owned 1.5% of the market, now they own 20% ' much of that in export issues that correlate perfectly with Nasdaq.
If the yen remains strong investors should look to some salient points that reflect better on Japan than has been the case for many years. With the bursting of Japan's bubble the country has pored over company accounts from every angle. Pension liabilities have been recognised and equities and real estate held for sale are marked to market.
Bad debts have been written down and corporate practices restructured for bottom-line growth. Japanese companies never over-paid senior executives nor is consumer debt high.
Japan is by no means the perfect model but if Japanese individuals are to be encouraged to spend, which they must, and overseas individuals are to save, which they certainly should, the end result must be good for the Japanese domestic economy and almost certainly bad for export related stocks globally.
If the US is a nation built on confidence, we could argue that Japan was one built on savings. That being the case, the recent outperformance of Japan could be less of an aberration and more of a long-term safe haven, backed by a strong currency.
Investors are too bearish on the yen.
Japanese have bought domestic shares.
Value levels in the market are compelling.
Tech and export stocks close to US activity.
Foreign investors have 20% of the market.
Foreigners cautious on domestic sector.
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