The Tokyo stock market has recovered strongly since last year, although there has been an extremely ...
The Tokyo stock market has recovered strongly since last year, although there has been an extremely wide dispersion of returns among different industries.
As in other markets, until very recently technology, media and telecommunication (TMT) stocks have led the market, while a number of other sectors have languished. Indeed many stocks are trading at new lows.
In the year to 31 March 2000 the TOPIX index has risen by 35% in yen terms; telecommunications rose 153% and services gained 107%; cyclical sectors fell including construction (-31%), air transport (-27%) and textiles (-15%).
Many companies outside TMT are on low valuations, but so far this has passed unnoticed by investors who have continued to favour companies with high returns on equity or growth potential. What is necessary for the value in a large portion of the Japanese market to be realised?
The key to unlocking this value lies in restructuring, either by existing company management or potential predators. Businesses need to improve returns so that investors will put a higher valuation on the company. In the absence of such catalysts, it is unlikely many investors will have sufficient patience to invest in the pure 'value' stocks.
The restructuring theme has been present in the market for over two years and has involved Japan's corporations in their most radical reorganisation in history. The pace has slowed recently as economic conditions have improved.
Recently the authorities appear to have weakened their resolve to force through a substantial and much needed reform of the banking sector. Although restructuring is welcome, it is long overdue and the pace remains slow by international standards.
The other factor that could promote interest would be the appearance of hostile take-overs in Japan. Here, the evidence to date is mostly discouraging. Earlier this year Mac Corporation became the first Japanese company in decades to make a domestic hostile takeover attempt when it bid for Shoei, a trader of electronic components and real estate.
Although the offer was at a premium and Shoei had underperformed badly over a prolonged period, it was accepted by less than 7% of Shoei's shareholders. The large cross-shareholders chose to back the management for relationship reasons.
Friendly takeovers or investments, often by foreign companies, that result in improvements in efficiency are more likely. The Renault/Nissan and DaimlerChrysler/Mitsubishi Motors deals fall into this category. Such tie-ups are likely to continue, since many Japanese companies require capital or greater scale to compete globally.
David Heath is an investment director of AXA Investment Managers UK
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