By Scott McGlashan, manager of the Close Finsbury Japanese Equity Fund The final quarter of 2002...
By Scott McGlashan, manager of the Close Finsbury Japanese Equity Fund
The final quarter of 2002 was a poor one for the Japanese market. Over the period, the Tokyo Topix Index fell by 8.4% according to Bloomberg.
Disappointment over the government's failure, once again, to take meaningful action to stabilise the banking system triggered selling by both foreigners and domestics. At the end of last year, changes to capital gains tax, effective from 1 January, encouraged private investors to dump stock aggressively.
This poor stock market performance occurred despite highly encouraging interim figures, which showed non-financial corporate profits increasing by nearly 50% in the half year to 30th September. The majority of companies maintained or slightly increased their full year forecasts. This good profits turnout was the result of modest economic growth and, more importantly, of the benefits of restructuring coming through.
The outlook for the first quarter of 2003 is, to say the least, difficult. Global prospects ' a possible war in Iraq, high oil prices, US and European slowdowns, the spectre of deflation ' are depressing an already suicidal Japanese investor.
The last day of March is generally seen as crunch time for the banks, and the market will play its annual guessing game of which bank is most likely to go belly-up when it files its year-end accounts.
There is also the seasonal problem of the accelerated unwinding of corporate cross-shareholdings with which to contend. And with Tokyo the one major city definitely in range of North Korean missiles now potentially loaded with nuclear warheads, it may be optimistic to expect anything better than a market which drifts lower. However, none of this may happen. Saddam may decide he would like to live another day, even if it is as ex-Iraqi dictator; should Saddam go, the oil price will drop.
While one despairs of the Europeans, recent changes in the Bush administration and statements from the Fed about running the printing presses suggest that a double dip recession and deflation becoming a reality are unlikely to materialise. Most of the Japanese banks have been effectively bankrupt for a decade, so it could hardly be a surprise to the market should one admit to the reality of what the market is already aware.
The dumping of stock as cross-shareholdings will create problems for individual shares but may not be a problem for the market as a whole. This is because by virtue of corporate stock buy-backs the corporate sector has been a net buyer, not seller, of shares in the market since last June. Unfortunately, North Korea's leader Kim il Jong remains completely unpredictable.
The gloomy possibilities mentioned above are already built into the market. The Nikkei Dow Jones Index is trading below its 50 year moving average, the prospective P/E on the highly tentative forecasts for fiscal 2003 is below 15, and the average dividend yield is above l0 year bond yield for the first time since 1955. As I have written before, Tokyo is a market long despair and short hope; the risk reward ratio must favour investors.
Restructuring benefits coming through.
Risk reward ratio must favour investors.
Non financial corporate profits up about 50%.
Tax changes may lead to stock dumping.
Global prospects affects Japanese investors.
On-going uncertainty in banking sector.
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Caused by falling oil price