Japanese equities have offered little shelter from the global setback in technology stocks over the ...
Japanese equities have offered little shelter from the global setback in technology stocks over the last three months, with Topix and Nasdaq proving to be highly correlated.
Japanese technology stocks, which had enjoyed so much success in 1999, have suffered large falls as a result, while previously ignored old Japan sectors such as textiles, construction, oils and glass, have been among the best performers.
However we remain unimpressed by the old Japan, detecting little sign of the changes necessary to introduce shareholder value and greater profitability.
It is therefore difficult to see how such companies can maintain their recent market leadership in the longer term. The breakdown of the planned merger between Asahi, Sanwa and Tokai banks is illustrative. Not only is this another setback for the vital reform program aimed at saving Japan's failing banking sector, but it is also a blow against the development of merger and acquisitions in Japan; an area that remains highly sensitive but vital for the regeneration of the old Japan.
Strategically, therefore, we favour high growth stocks rather than the value stocks of the old Japan. However, there are other areas of potential in Japan. Semiconductor manufacturers such as Rohm have an excellent earnings outlook thanks to the huge global demand for chips from PC and mobile phone makers. Meanwhile in clothes retailing, consumer preferences have swung dramatically towards new entrant discount stores, such as Fast Retailing. As department store sales continue to fall, this exciting and aggressive entrant recorded an exceptional 83% rise in sales in the year to May.
The outlook for Japanese equities is enhanced by the fact that the Japanese economy is showing increasing signs, albeit patchy, of a recovery. Recent positive indicators include unemployment, which looks to have peaked after falling 0.1% in April to 4.9%.
As the economy creates more jobs, sentiment among Japanese consumers should improve, thus helping to create stronger consumer demand in the future. However, the economy is not out of the woods yet, as shown by corporate bankruptcies which rose 12.4% year-on-year in May.
This marked the seventh successive monthly rise, and while business failures are running at such a rate doubt must be cast on any forecasts of a significant pick up in consumer confidence in the near term.
The tentative economic recovery also provides a positive backdrop, as does the fact that the US economy looks to be slowing down. If the recent reduction in US interest rate expectations is not premature, and if Nasdaq begins to stabilise as a result, then the high growth companies of the new Japan will soon be able to reassert themselves.
Richard Whittall is Fund Manager of Save & Prosper's Japan Growth Fund
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