With the Nikkei having hit its lowest level since 1985 in March, there is a growing belief that the ...
With the Nikkei having hit its lowest level since 1985 in March, there is a growing belief that the market could be turning a corner, fund managers believe.
The small-cap arena is seen as presenting buying opportunities at present valuations.
Last year, new economy stocks declined very sharply after their larger capitalisation counterparts fell off in response to volatility in the US IT sector.
Hisae Toews, a fund analyst at Fidelity Investments, believes the sector is now diverging from the US because of the emergence of attractive valuations relative to growth prospects in Japan.
'The growth momentum is still intact ' many of these companies are posting double-digit earnings growth. The problem was simply that valuations were too high. We are now seeing prices approaching levels that look attractive,' he said.
In 1999 and 2000, fund manager Asako Kibe focused on growth, with less concern over valuation ' which was beneficial in 1999 and painful in 2000. Now, Toews says, valuation has become a key criterion in stock selection.
Ed Merner, fund manager at Atlantis, said: 'Most investors think Japanese stocks are now cheap and even on a worst case basis already bottoming out with most of the possible bad news already discounted.'
He concedes that lower overseas stock prices, especially in the US, could, along with a serious recession in the US and Europe, have a very negative impact on Japanese investor confidence. However, he believes that much of the bad news has now been factored in.
'This has already happened and has resulted in lower prices for the technology issues, especially the electricals and communications.'
Despite the relatively lacklustre response to the financial package unveiled in early April, news at the corporate level is encouraging.
Merner said: 'Companies have been cutting domestic capacity, moving labour intensive operations offshore and cutting costs to become more efficient. There are a number of areas where Japan remains highly competitive including new materials, semiconductors, high technology parts, machine tools, higher quality autos and auto parts, and even in consumer-related products like, for instance, plasma liquid display screens, flat screens and game machines.
'Software is a booming industry and, to date, demand remains strong with little indication of a slowdown. Many companies realise they are using old, inefficient software and are now hurrying to catch up.'
The fund is finding a number of opportunities, while cutting exposure to overvalued or underperforming issues. 'We are positioning ourselves for the expected recovery in stock prices and have, therefore, reduced our cash position and increased the leverage for the fund. Although we think the market will continue to be volatile, we remain optimistic on the long-term outlook for the market and think the downside risk is fairly limited.'
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