I recently spent two weeks in Japan that provided the opportunity to see more than 20 companies, as w...
Over the past couple of months there have been signs that foreigners have been net buyers of Japanese equities. Domestic institutions, on the other hand, appear to have been selling equities and buying bonds. Meanwhile, individual investors have been net buyers of equities, particularly smaller companies, a fact confirmed by the returns of the OTC market, which has risen by over 113% in local currency terms so far this year.
From a cyclical point of view, the Japanese economy now seems to be in the process of bottoming out. The government seems to be taking a more medium to long-term approach towards finding solutions to the economic problems than they have in the past. Rather than implementing traditional public works policies, they are now encouraging those who are out of work to retrain and gain alternative skills.
Signs of decoupling between the stock market and the economy have become more apparent as restructuring across many sectors has continued to take place. In addition, the Asian economies have started to recover, and as a result Japanese exporters to the region have started are benefiting. Inventories have been allowed to run down to historically relatively low levels, particularly in the basic materials sector. This has also helped to improve the pricing power of companies.
Nevertheless, it remains culturally unacceptable in many areas to let wide scale redundancies take place. Many companies remain obligated to their workers, although employees are no longer as likely to be paid on the basis of the length of service with a particular organisation but rather on a performance-related basis.
Corporate restructuring has begun and changes in management strategy are underway. Companies within the general manufacturing and basic materials sectors that suffered from overcapacity in the past are now analysing returns on assets. Many are also pulling out of their more peripheral businesses and are adopting more Western business strategies.
Reflecting these measures, we are overweight the basic materials sector with an emphasis on industry leaders. We also remain positive on the services sector, particularly software companies, as there appears to be a trend towards increased software spend as a means of increasing industry productivity. Companies we like include Fujitsu Support and Systems.
We expect to see a good deal of growth across the IT sector next year as companies increase their spending after 2000.
Recently we became involved in the IPO of Pasona Softbank, a massively oversubscribed recruitment agency. It specialises in providing staff for the information and financial sectors. Job outplacement has historically run at about 0.6% of the market, but it seems set to increase as a number of restrictions that were in place in this area have only recently been lifted.
A good example of one of the more deeply cyclical companies visited was Oji Paper, Japan's largest paper producer. They published their full-year forecasts towards the end of the last fiscal year in March. Signs have since begun to emerge that shipments and pricing during the past few months have started to firm up by a reasonable degree.
Despite these more positive signs for the stock market, we feel a certain amount of caution is needed as a number of outstanding economic issues remain that need to be addressed before we are out of the woods.
Principally, we remain worried about the sustainability of growth during the latter half of the year, when the current round of public works are set to finish.
Anne Marie Main is head of Japanese equities at Hill Samuel Asset Management
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