The lack of clarity on the prospects of the Japanese economy means many managers remain neutral in t...
The lack of clarity on the prospects of the Japanese economy means many managers remain neutral in the market going into 2002.
Despite that, some say this year could be one of the most eventful in recent times with the banking crisis likely to come to a head, possibly even in this quarter.
Banking reform remains key to the market's future, as does cutting non-productive infrastructure spending, according to Invesco Perpetual's Paul Chesson.
He says cutting infrastructure spending appears to have little opposition from the public but the crucial point of the year will centre around the policy action taken when the banking crisis comes to a head, fuelled by a convergence of low equity valuations, reduced deposit insurance, the ongoing FSA inspections into banks' loan books and recession.
If companies are allowed to go to the wall, and banks to go bankrupt, the markets might drop sharply but will have the chance to rise meaningfully later in the year. Those investing near the bottom could see some very attractive returns, Chesson says.
However, he adds that if a fudged bail-out option is pursued, as in 1998, then the cycle of problems will occur again at a later date.
The effect on the market of partial implementation of reforms, bringing economic pain but no significant gain, could have a dire effect on the market.
Alan Booker, senior fund manager at Legal & General Investment Management, agrees that the banking crisis will reach its peak this year. Although he is not as specific about the timing, he also argues that the country needs to confront problems in this area for the market to move on.
Booker says: 'If banks go bust, the government will be forced to pay out, which will mean there should be more liquidity in the market.'
He stresses that changes must be made this year because nervous investors may start withdrawing money as the deposit insurance scheme, protecting savers, expires at the end of 2002.
Chesson believes if this process is allowed to take its natural course, many companies sheltered from bankruptcy could go to the wall. This would allow rationalisation, benefiting strong companies within each industry.
Another potential fallout of the banking crisis, he says, could be that many banks will be unable to pay shareholders dividends.
This would result in the government's large convertible preference share holdings in banks to be converted to ordinary shares.
The tone of economic and corporate data continues to darken for Japan, according to John Hatherly, head of global strategy at M&G.
The outlook is not entirely negative, however, and Legal & General is neutral rather than underweight the market.
Booker says: 'Valuations are nearing historical lows so we are less bearish than we were. Some stocks have definitely been oversold and there are opportunities in the market.'
He cautions, however, that gains in the market could be wiped away in currency losses by a yen that is likely to devalue.
Valuations at historically low level.
Take advantage of global rallies.
Bank restructuring could boost liquidity.
Weak yen could wipe equity gains.
Structural changes difficult.
Government bonds being undermined.
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