Fund manager's comment/Fraser Laird
The election of a popular prime minister with a mandate for reform could be expected to generate a little enthusiasm from stock market participants. After all, Japan has a moribund economy, an ageing population and a rapidly deteriorating fiscal position; surely the prospect of change would be welcomed? Not really, judging by the Nikkei's reaction: after a short-lived rally, the market is back down on its knees.
Investors have been unnerved by poor economic data that is primarily a reflection of the slowdown globally. Leading international technology, media and telecoms stocks such as Nokia and Nortel have been impacted by this slowdown, reporting disappointing earnings and hitting sentiment towards Japanese tech plays.
It may be, however, that by focusing on short-term conditions, investors are not fully appreciative of the potential change under way in Japan. In Koizumi, the Japanese have a politician who may be able to effect the structural changes where others have failed. His advantage lies in both the unprecedented popular support that he enjoys and in his background as a mainstream LDP politician rather than an outsider.
Crucially, he should also benefit from a constructive relationship with the Bank of Japan. Koizumi can therefore expect to be rewarded for pushing through tough legislative proposals by supportive monetary action, as required.
Encouragingly, the timeframe for action is relatively near-term. While it is true that there has been little in the way of detailed policy announcements since Koizumi's election this is set to change. Specifically, the broad thrust of proposals will be released in the run up to the Upper House election on 29 July and we can expect the hard detail to emerge thereafter.
In this environment, which areas of the market are likely to be of most interest? Domestic-oriented stocks should potentially benefit relative to technology, as this is where the greatest inefficiencies lie. Pressure on banks to clean up their balance sheets will hopefully result in a number of bankruptcies of very weak companies, thus allowing the surviving companies a greater chance to thrive. However, with a languishing economy, many industries will still face demanding conditions and thus investors are still likely to place a premium on companies that are restructuring their own businesses. Banks themselves, having been sold down aggressively, may rebound ' although any sustainable move will be dependent upon their ability to improve core profitability.
To conclude, Japan has set the scene for far-reaching change that will hopefully culminate in a revitalised economy. Hard decisions lie ahead, and vested interests have won the day before, but Koizumi's popularity rating suggests he represents a considerable force for change.
Koizumi riding high on tide of change.
BoJ ready to play supporting role.
Market valuations quite reasonable.
Slendebroek CEO since 2014
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