The Japanese economy is experiencing a narrow export-based recovery, but higher liquidity will be re...
The Japanese economy is experiencing a narrow export-based recovery, but higher liquidity will be required if the country is to achieve sustainable above-trend growth.
Accelerating global demand, rising capex and the emergence of new Japan should favour our preferred sectors despite the recent market sell-off.
We are bottom-up stock-picking among small companies listed on the TSE 2, OTC and, occasionally, TSE 1 exchanges with a focus on firms with three to five-year growth rates of 10% to 15%pa, a high market share or technological lead, and a high ROE. With corporate profits set to rise this year, capex, which has recovered somewhat, should hold up, particularly IT spending.
This would benefit the tech and telecoms sectors. We favour Yahoo, for example, a joint venture between Softbank and Yahoo Inc of the US. Sales are rising by two to three times year-on-year and recurring profits by three to five times.
Net One Systems, the Japanese agent for Cisco, is enjoying strong orders for internet-related equipment and has a technological edge over its competitors.
Trend Micro sells anti-virus software, particularly internet applications, and has expanded abroad. The shares are richly priced, but sales and margins should rise along with internet penetration.
Prospects for consumer spending in Japan have improved marginally. Bonuses should rise in 2000 after a three-year decline. Job offers and overtime hours are trending up. The personal savings rate, historically high at 13.9%, should fall to around 12%.
Rising consumption should benefit Aeon Credit Service, a credit card company and a member of the Jusco Group. The firm enjoys strong momentum due to card tie-ups with other companies. For the year to February 2001 we expect operating revenue growth of 10% and profits growth of 38%. Sundrug, a leading Tokyo drugstore chain, should have medium-term sales and profits growth of 18% and 25%pa respectively, and is one of our core holdings. Management focuses on keeping overheads down and is targeting suburban locations for future expansion.
Healthcare firms should begin to see accelerating earnings growth as the population ages. Nichii Gakkan, which is now looking at home nursing, has a target age group of individuals over 60, who by 2025 will make up 30% of the population.
People, an acquisitive fitness-club company, should enjoy membership growth of 20%pa, as the Japanese are expected to become more health conscious. The industry has high fixed costs and therefore good operational leverage as membership rises.
Finally, we favour outsourcing companies such as FSAS which offers systems, security and web solutions across the country. The shares have suffered due to a downward earnings revision for the year to March 2000 and concern over one of the firm's licenses. The company's core business, Bellsystem 24, nevertheless remains healthy.
Masato Kawada is the fund manager of the INVESCO Japan Smaller Companies fund
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