Japanese technology stocks have stabilised after heavy drops over the calendar year, but mixed econo...
Japanese technology stocks have stabilised after heavy drops over the calendar year, but mixed economic newsflow from the US continues to limit near-term growth prospects.
Over the calendar year to 20 August, the Nikkei is down 8.7% and the Topix 8.4% in yen terms, although the software sector is even further off, down 15.41% over the same time frame.
The relative underperformance of technology stocks over the past two-and-a-half years has been well documented and consensus is emerging that the sector and broader market may well have finally bottomed.
The potential for upside over the remainder of the year is more debatable however, and largely depends on the economic newsflow emanating from the US.
Ross McFarlane, portfolio manager at Britannic Asset Management, says given the lack of visibility regarding earnings growth moving forward, he has been running a broadly neutral weight position in technology over the course of the calendar year.
McFarlane says: 'Capacity utilisation is still low for the industry as a whole, although inventories have been run down and are now low as well. Japanese technology stocks mirror what has been going on in the US because that market is so important for them and as the Nasdaq has been weak, so have they.
'Asian exports have been doing well, but you have to question how much of that has been re-exported to the US. Although the Asian markets are important to Japan, the US remains the main determinant.'
He adds the sector has been so badly beaten down that after July's particularly weak economic numbers the sector seemed to find a bottom from which point it has rallied slightly. The question remains though whether this can be built on and this depends on order flows picking up in the near-term.
Graeme Sinclair, investment director at Aberdeen Asset Management, says a lot of Japan's technology companies, such as Advantest and Tokyo Electron, are market leaders in their fields, and at current valuations are looking attractive.
Sinclair says: 'Tokyo Electron is down 70% from its peak and although most of that fall was in 2000, a recovery in orders is needed as a catalyst. The question is when that will take place and how strong a recovery it will be. Recent economic newsflow has been consistent with a very slow gradual recovery.'
Although he admits the valuations are now more compelling, Sinclair remains underweight the sector, concentrating his exposure on market leaders with a strong competitive advantage, such as Canon and Rohm.
He is zero weight software companies and technology small caps, pointing to sentiment shift against these companies as their earnings outlook has deteriorated.
Within McFarlane's neutral weighting of the broader technology sector, individual sub-sector weightings vary noticeably.
He has maintained overweight positions in precision instruments, where he is favouring Canon, and consumer electronics sub-sectors. Although currently zero weight software companies, he has traded in and out of the sector over the course of the year, while holding underweight positions in the semi-conductor and general electronics sub-sectors.
Excess inventory levels cut back.
Valuations more attractive.
Exports to Asia remain strong
Earnings outlook for sector remains unclear.
Economic data indicates weak recovery.
A number of companies in sector in debt
Has been cold-calling consumers
New shares admitted to London Stock Exchange
Slow and steady growth
Missed funding target by £240,000
Denies any wrongdoing