As deflation comes to an end in Japan, managers have been positioning portfolios towards banking and...
As deflation comes to an end in Japan, managers have been positioning portfolios towards banking and property stocks.
Invesco and Scottish Widows Investment Partnership (Swip) both have overweight positions in these sectors.
Tony Roberts, a manager on the Invesco Japanese Equity fund, says: "The banking sector will be a beneficiary of inflation. For the past two months inflation has turned positive at around 0.1% and I expect the Bank of Japan to end its zero rate interest policy this year."
One bank in Robert's top 10 is Sumitomo Mitsui Financial Group. He likes this company as it has a diversified business and not only has a loan but also a broking operation in addition to asset management services.
Although P/E earnings growth is expected to be 17 times for the year ending March 2006 and 16 times for the year ending March 2007, compared to the market average of 20, he does not see these as pessimistic figures.
Rather, Roberts believes Sumitomo Mitsui Financial Group is currently undervalued because many analysts perceive there are still risks associated with the banking sector if the economy downturns and consumers stop spending money.
However, Roberts thinks it is hard to see what is going to derail the economy. Although there might be some tax rises later this year, he points out companies are starting to put money back on their businesses and wages are increasing.
Matthew Harris, investment director of Japanese equities at Swip and manager of the Swip Japan Growth fund, says: "One company that will benefit from the Bank of Japan raising interest rates is Mitsubishi UFJ, as this company is starting to increase its mortgage business and has expanded into securities as well as selling investment trusts and life assurance products."
Another area where Roberts is overweight is the housing sector. Land prices have been falling for years, but they are now rising in city centres such as Tokyo and in more rural areas.
Figures from the Ministry of Land, Infrastructure and Transport shows land prices rose for the first time in 15 years last July, with commercial property seeing a 0.6% increase, while residential property rose by 0.5%.
Another stock that Roberts believes will benefit from higher interest rates is housing group PanaHome. He says, although the company is expensive in terms of P/E ratios at 41 times earnings, he thinks it is a turn around story.
According to Roberts, profit margins have fallen for the company from 9% in the mid 1990s to 1% last year. He says although this may look bad, the company has been restructuring. It has since reduced staff levels and has launched a number of new services including electronic packages.
Roberts expects operating margins next year to be around 6%. He feels that as analysts have not covered this stock in depth, once it is known that its profit margins have improved there could be a rebound in its share price.
A real estate stock in the Swip Japan Growth fund top 10 is Mitsubishi Estate. This company is expected to develop 3,500 condominiums for the Tokyo market, so Harris thinks it will be a beneficiary of rising property prices.
Another company he likes is Yasuraji, which buys houses at auctions and renovates them. He thinks the firm is undervalued because not many analysts have been covering it and the company results have been strong.
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