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