Despite the recent rally, many fund managers and analysts are cautious about the Japanese technology...
Despite the recent rally, many fund managers and analysts are cautious about the Japanese technology sector, seeing it as overpriced and rising too fast.
Andreas Schusper, a member of the management team at F&C Anglo-Nippon Unit Trust, believes a reduction of inventories is driving the sector. 'Demand is recovering because inventories have been used up and old orders have been sold off,' he says.
Enthusiasm over recovery in the US market has also benefited the sector because it is largely export-driven, says Schusper.
Despite positive signs for the Japanese technology sector, Schusper remains cautious, as he feels many tech companies are overpriced. 'It looks like movement has been too fast and could drop back,' he says.
Simon Donne, manager of the Threadneedle Japan Growth fund, says the semiconductor production equipment (SPE) has been one of the best performers, exporting to Korea and the US.
Tokyo Electron, Advantest and Disco have led this market, according to Donne, but he cautions: 'Having performed well, we now think the valuations are stretched. We are more cautious on SPE companies.'
Donne has moved from overweight semiconductor production equipment to underweight.
He is underweight industrial electronics companies, which he sees as unfocused and uncompetitive. 'We are unsure,' he says.'If real restructuring takes place, they may become a better investment.'
He is overweight component companies which make parts for cellular handsets, PCs and DVD players ' all of which have performed well in the rally.
Nicky Ludlum and Jonathan Schiessl, managers of Ashburton's Asia Pacific Fund, support the view that tech stock prices are too high and have moved to underweight the sector.
'We are favouring mid-cap tech stocks where valuations are more attractive and visibility of earnings is greater,' says Ludlum.
'We believe the recent strong run in semiconductor and component-related stocks has fully discounted much of the good news and valuations are beginning to look stretched. We envisage profit-taking in these stocks in the short term, especially if we see a sell-off in the US-related tech names.'
Basil Masters, chief investment officer at CrÃ©dit Agricole Asset Management, Japan, says the Japanese market has performed on the back of increased investor demand as both domestic and foreign investors began to 'up-weight' Japanese equities in their portfolios.
He says: 'One can argue that the Japanese market has been underperforming global benchmarks for such a long time that some rebound was imminent. Another argument is that the recent stricter rules on short-selling resulted in massive short-coverings by hedge funds which pushed the market higher.'
He says that even though industrial production numbers remain weak, inventories are at their lowest level since 1990, although still high.
'Elsewhere, we are likely to see some inventory rebuild and an end to poor statistics,' he says. 'Exports in January were almost unchanged year-on-year, showing that Japan's export machine is still capable of delivering when there is demand and a favourable exchange rate.'
Inventories at decade lows.
Component companies offer opportunities.
Some signs of economic upturn.
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Group income protection
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