Smaller companies are looking attractive in light of lower prices following the March correction and...
Smaller companies are looking attractive in light of lower prices following the March correction and their continued growth prospects.
Sarah Whitley, partner at Baillie Gifford, feels there are good opportunities at the moment, with a number of small caps attractively valued.
In particular Whitley finds the service sector and specialist retailers interesting and is favouring the low cost, high quality retailer, Fast Retailing.
She says: "This is a controversial company as its presence in the market has changed the competitive landscape in the retail sector in Japan.
"It will continue to do well as it sources clothes at attractive prices."
For example, while the price of a fleece at the Gap sells at ´4,900, Fast Retailing sells it at ´1,900.
Craig Mercer, investment manager at Scottish Equitable, is negative on the overall small cap market in Japan, noting liquidity has dried up substantially in the last six to nine months which has reduced the number of investible companies.
However, he believes there are opportunities, especially in the auto sector and in optical components.
He says: "Aida Engineering is attractive as a play on capital expenditure by the auto market. The market has already discounted rising prospects for capital expenditure for IT companies but has overlooked improving capital expenditure from auto companies.
"Valuations are very cheap and the market is not expecting any growth in the car business. We believe orders will be much higher than expected." Mercer finds Park 24, a car park operator, good value. He adds: "It is a very good play on structural problems in the real estate market. It has been able to parcel up small plots of land and use them as car parks without manning them. It uses coin operated machines and as such is a very low cost operation."
He is also keen on optical components.
He says: "There are extremely good Japanese companies operating in this area. The market has only woken up to it in the past 12 months. There will be a few new companies coming into this field in the next 12 months."
Scottish Equitable favours Seiko Giken, an optical component technology company.
It has been very successful on the market and its share price has more than tripled from ´18,000 to ´65,000 since it was floated in August, Mercer says.
The group did have holdings in the company which it sold recently because it perceived the short term valuations were becoming stretched.
Mercer believes small cap companies are likely to be more sensitive to Japanese government restructuring.
Large cap companies are in the strongest position in terms of balance sheets and cash flow and are thus able to weather the storm more effectively, whereas small cap companies are in a weaker position, he says. By contrast he points out some small cap companies have better sales growth prospects and can grow away from problems as long as they are not concentrated in the old Japan areas.
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