Expectations for Japan's economy continue to get gloomier. The latest forecast for GDP growth in 200...
Expectations for Japan's economy continue to get gloomier. The latest forecast for GDP growth in 2002 from Salomon Smith Barney is for a 1.8% drop, a downgrade from the company's earlier prediction of a 1.2% fall. The company is also predicting that deflation will worsen with consumer prices falling by as much as 1.7% in 2002.
Tomoko Fujii, economist at Salomon Smith Barney, paints a negative picture of the external outlook for Japan.
She says the economic growth in Japan's key export markets will probably slow from an estimated 5.7% in 2000 to about 1% in 2001 and is only set to increase slightly in 2002. Fujii adds that this will lead to lower corporate profitability and production cutbacks.
Despite an economy that is continuing to flounder, Nick Reid, senior investment manager, Japanese equities at Gartmore, argues that there are plenty of opportunities in the market.
Reid notes that the change in the structure of the market allows greater room for manoeuvre.
He says: 'In the past, little tended to differentiate the top 10 companies in a particular sector, for example, in terms of profitability or growth.'
Reid argues that differentiation within sectors is a new phenomenon for the market and will allow stock-pickers to better identify outperforming companies.
He says: 'There is much greater competition and the key is to invest in only the best companies in a sector.'
Jon Greenhill, director of Japanese equities at RSA Investments, also sees this shift in the structure of the market as an opportunity. He says: 'There are a number of companies in the market that are being treated the same, although their fundamentals vary greatly.
'There is an amazing amount of uniformity in pricing, and some of the weaker companies have been bid up aggressively and have prices that are not justifiable.'
Greenhill states that some defensives stocks have outperformed for too long and cites railway companies as an example of a sector that may be overvalued.
However, he says the market is not set to change dramatically in the short term, so it is not necessarily a time to become more cyclical.
Reid also stresses the fact that the economy has not changed significantly and says that initial expectations of meaningful reforms after the election of prime minister Koizumi have dimmed.
'Koizumi promised much but so far has delivered very little. He is not an economist and he does not seem that interested in where the stock market is going,' says Reid.
'I am no longer expecting that much from the prime minister in terms of reforming the economy and the financial system.'
This lack of action spreads throughout the political system. Fujii, says that the Bank of Japan (BoJ) remains reluctant to take big enough steps to tackle deflation.
Fujii says: 'The BoJ policy board has remained reluctant to adopt aggressive pressures to stem the drop in price levels, even as it recognised that deflation is accelerating.'
Opportunity for stock picking.
Restructuring taking place.
Banking reforms in the pipeline.
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