After a particularly turbulent 2000 for Japanese equities, analysts are divided over whether the mar...
After a particularly turbulent 2000 for Japanese equities, analysts are divided over whether the market, and the economy in general, will recover during the course of this year.
Some of the more pessimistic forecasters predict that if the threatened hard landing does occur in the US, the ensuing slowdown in Japanese exports to America could force Japan back into the clutches of recession.
But despite such fears, many fund managers in charge of global portfolios are still overweight in Japan and positive about the long-term economic outlook. Director of Exeter Fund Managers Richard Scott says he currently has around 10.5% of his global diversified funds in Japan - overweight against the market average of 8.5% - and plans to increase his weighting to around 13% after the Japanese year-end in March.
He says: "Even if there is a hard landing in the US, there are reasons why the pessimism surrounding Japan is unfounded. The country has seen a profitability upswing of late and corporate investment has been one of the strongest areas in its gradual economic recovery over recent years. Despite its weak public finances I think there is scope for the Japanese economy to grow."
Colin McLean, managing director at Scottish Value Management, is also slightly overweight Japan in his global fund, although he is not entirely confident that Japan will make a full economic recovery. He cites Japanese hedge fund managers buying bonds rather than equities as evidence of many specialists' lack of faith in the economic outlook.
But McLean does not believe the potential hard landing in America will contribute to future Japanese economic difficulties. He says: "The Japanese market has already fallen heavily and seems to have factored a possible hard landing into prices already. There are also a growing number of global Japanese companies taking leading positions in consumer areas - like Sony with its new Playstation for example. These organisations will always do reasonably well even if the Japanese economy is sluggish."
Baillie Gifford chief investment officer Richard Burns is also of the opinion that a hard landing in the US - which he sees as a possibility after the Fed's recent interest rate cut - will not be particularly influential on the Japanese economy. He believes Japan's problems are internal rather than external.
Burns is currently underweight Japan in his balanced pension portfolio, and says he needs to see some positive economic news before changing his stance.
He says: "The weak Japanese government looks unlikely to solve the main problems of sluggish economic growth and the poor state of the banking sector. Add to that the negative effect of cross-holdings on share supply and demand, and there is little to convince me that the market will perform well."
Burns does see signs of personal consumer growth, however, and says the general profit performance among Japanese companies is encouraging. With a weakening yen in mind, he believes electrical component companies could have a good year, along with the smaller end of the market and the faster-growing retailers in general.
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