In the year 2000, the Japanese equity market suffered a hangover from the exuberance of 1999. New Ja...
In the year 2000, the Japanese equity market suffered a hangover from the exuberance of 1999. New Japan stocks corrected sharply in the first quarter as Hikari Tsushin and others reported disappointing figures. The halving of the Nasdaq index from its peak in March 2000 also hurt sentiment in Japanese tech names. Litigation worries hit individual stocks such as Bridgestone, Toyoda Gosei, Mitsubishi Motors, and Snow Brand Milk. Finally concerns over a slowing economy and the impact on corporate profitability has negatively affected the whole market.
Judging by economists' forecasts, growth in 2001 will be similar to 2000 levels in the 1-2% range, dependant on the US economy avoiding a hard landing.
One positive aspect of slow growth is that Japanese corporates will be forced to continue implementing aggressive restructuring plans.
For the current fiscal year, earnings growth (consolidated, ex-financials) is expected to exceed 30% (the highest since 1981) with only a 3% growth in revenues. With further restructuring occurring next year, profits are expected to rise by 15%.
Of greatest concern in Japan remains the public sector debt burden, currently more than 200% of GDP. The debt burden could be reduced through higher growth, an increase in taxation, or much higher inflation.
There are indications the new Bush administration in the US may encourage Japan to look to reduce debt. This could have significant implications for Japanese growth and the yen.
Another factor is politics, as the position of Prime Minister Mori looks increasingly untenable. MSCI Index changes could also be influential. The move to free float weighting could have a negative impact on some large Japanese companies such as NTT & Toyota and benefit others such as NTT DoCoMo & Seven-Eleven. Generally in 2001, we expect disappointing macro data to be offset by improving micro news.
The market, in falling by more than 25% this year, has perhaps discounted much of the bad news already. With the correction in prices and 30% earnings growth this year, the P/E multiple has come down to a more reasonable 26 times next year's earnings. This is with little benefit from any sustained economic recovery and continuing deflation. Any positive change to these two conditions would have a marked influence on profitability.
Given the macro problems in Japan, stock selection will remain critical in 2001. Companies that are adapting to survive in this difficult environment will be the winners in the market - it is no longer enough just to talk a good story as investors now want to see concrete proof of these changes coming through in improving profitability.
Simon Somerville is head of Japanese equities at Cazenove Fund Management
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