By Miki Sugimoto, a fund manager at Newton More than 12 years after the Japanese bubble burst, t...
By Miki Sugimoto, a fund manager at Newton
More than 12 years after the Japanese bubble burst, the economy is still struggling with the consequences. The economy is hobbled by the burden of the debts that were run up during the boom years.
The result is that the nominal value of retail sales has fallen for nearly four years and now stands at the same level as was seen just before the crash in 1990. Similarly, despite a rebound in production of nearly 10% from the lows in late 2001, industrial output is still below the level it was at the start of the last decade. Even the boost from the strong growth in the rest of Asia appears to be waning.
Japan is changing however, and one indication of this is in the labour market. Although the unemployment rate has risen by less than 1% since the start of 2001, this disguises the fact that the level of employment has fallen by over 1.5m.
Faced with a sluggish global backdrop, no real consensus on how the country's woes can be resolved and little political will to change the current status quo anyhow, macroeconomic newsflow is unlikely to drive stocks higher in the near term. However, with many investors uninterested in a market that has given little or no return over 18 years interesting opportunities do exist.
Year to date, the overall Japanese equity market has traded with large changes in expectation. The market moved from the beginning of the year's despair that Japan will lag the global recovery to large catch up in the month of February/March and subsequent decline in line with the worsening economic expectation globally. One of the key investment themes for Japan still continues to be restructuring/ industry consolidation. Many domestic sectors are still fragmented where there is room for the winning companies to expand market share and improve pricing environment. There is also company specific case of restructuring.
Typically, a company would have a good product/services but with poor management in terms of producing profit. After a difficult period, the management changes at which point it could become an interesting investment target.
At present, we are seeing more opportunities in the company-specific restructuring than industry-wide consolidation area. The technology sector has also seen company-specific stock performance. The benchmark electronic stocks with high valuations have generally underperformed the market year to date whereas Olympus Optical, an example of a structural niche story has performed well.
Companies like this one attract us, having a stable earnings stream with dominant market share.
The other area of interest is the growing outsourcing services sector.
As mentioned above, as both companies and the government are reducing their cost, the sector is structurally growing. Well-known examples in this area would be companies like Nichii Gakkan and Goodwill.
Both companies are seeing growing earnings from the nursing care of the elderly patients, the area was deregulated to allow private sector to participate.
Current valuations attractive.
Stock-specific in tech sector.
Level of unemployment has fallen .
Macro outlook remians dull.
Economy still hit by debt from boom years.
Boost from rest of Asia appears to be waning.
Follows McVey's resignation
Schroders and Aviva Investors
LightTower Partners, Seneca Partners and Unicorn AM
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