The news for Japanese bonds and equities continues to be negative, according to Fraser Laird, direct...
The news for Japanese bonds and equities continues to be negative, according to Fraser Laird, director of Japanese equities at Abbey National.
The group thought the market had bottomed out three months ago and so increased its weighting there.
Recent evidence has shown that the faltering economy is still holding the market back but a catalyst could easily turn the market around.
Laird says: 'The market may spin around on a sixpence if there is a piece of good news, such as the fact that foreigners have stopped selling.'
Tom Joy, fund manager of Schroders Managed Balanced fund, argues that Japanese and other Pacific economies are cyclical and will turn around when the global economy does. He admits this is not likely to happen immediately but argues now is not the time to sell in these regions.
One economy that has been performing differently to the rest of the region is Australia, according to Joy.
He says: 'The Australian market has performed well recently but it has less potential to do so in the future. Those that have not fared so well recently, like Hong Kong and Singapore, have much more to gain from a global turnaround.'
This prognosis is supported by Laird. He points out that Taiwan's Index fell by 16.9% in US dollar terms for the year to date while the Tokyo Stock Exchange First Section fell by 16.6%.
He says that these economies, and Japan in particular, will be the first to rebound from the downturn.
This anticipated turn-around in the equity market has also led to a more pessimistic view on bonds according to John Hatherly, head of global analysis at M&G.
He says that bonds had represented good value with the current low interest rates but increased government borrowing and less demand from investors as they move to equities means that returns are becoming less attractive.
Banks have been suffering particularly badly in Japan, Laird says, but notes that they may benefit from a change in policy that will be possible after the elections of the upper house.
He says: 'The government is trying to set up a body to buy liabilities from banks and it is set to take non-performing loans off the balance sheets.'
Hatherly says that Japan's situation now is similar to the UK's at the start of the 80s. He says that if prime minister Koizumi has success in dealing with the banks in limiting their holdings in other companies, it could prove to be a watershed.
He says: 'Nerves are apparent now the economy is weakening and tech stocks are low but if Koizumi successfully pushes through the changes, his credibility will be boosted and he may raise his game. This could prove the good news the market needs.'
Joy argues that the Japanese economy has been underperforming because investors perceive that Koizumi is not as pro-reform as originally thought or that he will not be able to carry out the reforms he has talked about.
Japan will be the first to rebound.
Reform of banks to boost confidence.
HK to benefit from global demand.
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