Optimistic fund managers in the managed sector should be looking to buy Japanese firms that are aggr...
Optimistic fund managers in the managed sector should be looking to buy Japanese firms that are aggressively restructuring, says David Mitchinson, manager of Asia Pacific at Framlington.
'The ideal opportunity would be a company that has restructured, is showing earnings growth, and is still undervalued,' he says. 'Realistically, this will probably push you towards the mid-cap area and more cyclical domestically-focused firms.'
Mitchinson believes blue chips enduring pain to cut costs and change management structures, such as NEC and Nissan, will also become more attractive.
Framlington has moved from an underweight position to a more neutral stance on Japan. Mitchinson believes investing in the area still represents a risk but is encouraged by the Japanese government's reforming stance.
'We're not super-bullish but feel the balance in Japan has shifted towards the reformers,' he says. 'The government is forcing the state telecoms provider, NTT, to restructure. Deregulation of the post office and the Housing Loan Corporation is also being talked about.'
Crucial for boosting long-term investor confidence in the country is reform of the banking sector, currently crippled by bad debts. To do this, the government must force reluctant banks to write off the debts and then pump in public money to keep the system afloat, says Mitchinson.
But he warns that the reforms could push an already depressed Japanese economy into recession. He says: 'A delicate balance needs to be kept to ensure continued public support for reform. The Bank of Japan has to be convinced that the government is serious about reform before it will relax fiscal policy. This would mean boosting the monetary supply, which in turn would increase inflation and end the cycle of falling asset values and profits. A rise in the inflation rate could also stimulate demand for equities. Too much inflation and the government debt repayments could spiral out of control.'
Because of this a recession is just as much of a threat in Japan as it is in the US, says Colin Robertson, head of global strategy at Threadneedle Investments. 'Japan is at a crossroads,' he says. 'The electorate is fed up with 1% growth over the past decade and has elected Koizumi with a mandate to reform. However, he faces a dilemma; he needs to carry out genuine reform but at the same time ensure that the cyclical position doesn't get too bad.'
Many people associated with the stock market have questioned whether the pain associated with reform is likely to outweigh the benefits gained, according to Robertson. But Threadneedle research indicates that although stock market earnings may be affected by as much as 20% this year, and a further 20% in 2002, it would take just a 0.25% increase in the long-term growth rate for the economy to gain overall.
In its global portfolios, Threadneedle is neutral on Japan and underweight in the US. Robertson says that, although Japanese firms are not far off from being fair value, Threadneedle is wary of buying heavily until it sees more of the fine detail in the government's reform plans. 'Despite this, it would be fair to say that we are becoming increasingly disposed towards Japan,' he says.
• Many Japanese firms restructuring.
• Government's reforming stance
• Potential restructure of banking sector.
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