Mar­kets in­creas­ingly op­ti­mistic

But econ­omy must still deal with de­fla­tion, high pub­lic debt and an age­ing work­force

Finweek English Edition - - Offshore investments - COPY: Leon Kok AD­VER­TIS­ING: Tracy Par­sons

THREE OR FOUR YEARS AGO, if you had rec­om­mended to South Africans that they in­vest in Ja­pan they would have thought you crazy. How­ever, hav­ing turned mildly af­ter a 16-year re­ces­sion, Ja­pan has pro­duced some re­spectable re­turns of late.

The win­ner of the latest “Rag­ing Bull” award in the best off­shore Ja­pan gen­eral eq­uity fund cat­e­gory, Or­bis Ja­pan Eq­uity Gen­eral Fund, boasted a 20,21% re­turn dur­ing the past year and an av­er­age an­nual 22,06% over three years.

Other Fi­nan­cial Ser­vices Board (FSB) reg­is­tered Ja­pan eq­uity funds that have per- formed well are In­vesco Ja­panese Eq­uity Core, which has gen­er­ated an av­er­age 17,67% over one year and an av­er­age 18,57% over three years, In­vestec GSF Ja­pan Eq­uity A Inc 17,67% (18,57%), Lloyds TSB Off­shore Ja­panese 13,65% (15,41%), and Pru­den­tial Ja­panese 13,57% (13,78%).

Th­ese are ster­ling per­for­mances given that the Ja­panese Stock Mar­ket was fairly staid last year. The Nikkei 225 rose only 3,3% in lo­cal cur­rency terms and 4,1% in US dol­lar terms. It’s still around 50% down on its record high, the re­sult of share prices hav­ing tum­bled dur­ing the 1990s be­cause of Ja­pan’s de­fla­tion­ary spi­ral.

The Nikkei 225, which has risen to a nine-month high this year, is on a 27 his­tor­i­cal price:earn­ings ra­tio and 17 on 2008 earn­ings.

The ques­tion arises: Will th­ese re­turns be sus­tain­able? The an­swer is prob­a­bly not in the short term but very likely in the longer term.

Man­agers of the JP (JP Morgan) Ja­pan Fund in Hong Kong told the writer that “while the solid earn­ings back­drop sup­ports the mar­ket, the lack of new cat­a­lysts, along with global risk, dis­cour­ages much in the

way of mul­ti­ple ex­pan­sion. Con­se­quently, we ex­pect the mar­ket to rise in line with earn­ings growth. A po­ten­tial short-term chal­lenge to the up side is the large pipe­line of new eq­uity is­suance that is ru­moured to be com­ing to the mar­ket”.

The most pop­u­lar hold­ings among fund man­agers are banks, trans­port equip­ment (mo­tor com­pa­nies), real es­tate, in­for­ma­tion & com­mu­ni­ca­tion, and elec­tri­cal ap­pli­ances.

A ma­jor plus is that new Prime Min­is­ter Shinzo Abe is de­scribed as a sym­bol and agent of a Ja­pan in tran­si­tion. Ja­panese com­pa­nies across a wide variety of sec­tors are ren­o­vat­ing their man­u­fac­tur­ing plants to meet new de­mand and Ja­pan is on China’s doorstep. Last year, the value of car ex­ports to the US rose about 50% on a year ear­lier, the fastest pace since 1997.

The econ­omy, how­ever, still faces se­vere pol­icy changes such as hav­ing to deal with per­sis­tent de­fla­tion­ary pres­sure, high pub­lic debt and an age­ing work­force.

The cur­rent ex­pan­sion does not mean th­ese prob­lems have dis­ap­peared. The bud­get deficit as a per­cent­age of GDP at 4,6% is far too high, and sec­ond to Italy among the de­vel­oped coun­tries. Even the US, which has been a ma­jor talk­ing point among criti- cal economists, is 2,3%. Given that one­fifth of the pop­u­la­tion is more than 65, growth will have to come from pro­duc­tiv­ity im­prove­ments. Large-scale im­mi­gra­tion, the quick fix for other ad­vanced economies, is not a so­cially palat­able op­tion in Ja­pan.

GDP this year is ex­pected to be about 1,5%, which is sig­nif­i­cantly lower than for other Asian economies such as China and In­dia (8%–10%), Malaysia (5,9%), In­done­sia (5,5%), Thai­land (4,7%) and South Korea (4,1%). Ja­panese in­fla­tion is around 0,4% and the min­i­mum in­ter­est rate 0,44%.

Ja­pan is the sec­ond-largest in­dus­trial econ­omy in the world and op­er­ates off a much larger base than its emer­gent-mar­ket Asia ri­vals. It is also still the des­ti­na­tion of choice for South African ex­ports. Over R32bn worth of goods are ex­ported to Ja­pan an­nu­ally, of which R18bn are man­u­fac­tured and R14,3bn com­modi­ties ex­tracted from min­ing and quar­ry­ing.

De­scribed as a sym­bol and agent of a Ja­pan in tran­si­tion. Prime Min­is­ter Shinzo Abe

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