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Eastern philosophy

Last week, Aberdeen’s Hugh Young was over from Singapore to share his views on Asian markets with investment professionals in London. I have known Hugh for some time and respect his judgement. He was responsible for developing the Aberdeen Asset Management investment process and recently he and his team picked up the outstanding investor accolade at the OBSR Awards.

I was keen to learn what he felt about this highgrowth area but, sadly for me, he had picked my birthday for the event. Although unable to attend, I did receive some valuable insight secondhand. While I am more suspicious of opinions gathered in this way, the impression I gained of his current approach accords with my knowledge of how he views these markets.

Hugh is, for example, healthily sceptical with regard to Chinese companies. I recall him warning some time ago of the need to remain close to the businesses in which he was investing as Chinese management has a propensity to embark upon frolics if left to their own devices. So mainland China was significantly underweight in the portfolios he ran, which embraced the whole region.

He is also pretty downbeat about Japan, describing the country as “moribund”. Given that I was reading only last week of a fund manager convinced the corner had been turned there, I found the conflicting views rather heartening. Japan is something of the Marmite of investment destinations – you love it or you hate it. By and large, those on the hate side of the equation have had a rather better time of it for a little while now.

Japan-watching has some merit. The country suffers from the developed world disease in spades. Excessive indebtedness, adverse demographic pressure, interest rates at virtually nil – this has been the story there for two decades. The result has been a stockmarket that has fulfilled Hugh Young’s description of “moribund” to a T. The worry is that this might be the model for the rest of us.

Japan is something of the Marmite of investment destinations – you love it or you hate it.By and large those on the hate side of the equation have had a rather better time of it for a little while now

On the plus side, Western markets had not been driven to sky-high valuation levels by the rush to participate in the biggest growth story since the second world war. Not only were international players jumping on the bandwagon, Mrs Watanabe, the ubiquitous domestic investor, was ever present. Today, it is the Mrs Watanabes of this world who are steadfastly refusing to re-enter the market, let alone the burnt gaijin.

And, of course, Japan had its own banking crisis but well before the financial meltdown that hit the Anglo-Saxon economies.

The result, of course, was that Japanese financial institutions escaped relatively unscathed from the credit tsunami that ripped around the world. But Japanese equities still remain at a fraction of the level achieved at the end of the 1980s, even if the valuation criteria applied today stacks up well against other markets.

Indeed, look at the numbers on what was the world’s second-biggest economy until China leapfrogged it earlier this year and you might conclude that the reason shares are failing to make progress is that investors are still refusing to forgive the value destruction Japan meted out over two decades.

Real GDP has risen since the bubble burst, albeit modestly, the corporate sector has deleveraged massively, dividends are rising and even the yen looks stable.

But Hugh, like so many fund managers, does not view this market favourably. In the end, that is probably as good a reason as any for being cautious but it will be worth keeping an eye on the land of the rising sun. Certainly, the overall tone of his presentation was optimistic for the Asian region. Or so I was told. I need to catch up with Aberdeen’s investment guru some time soon.

Brian Tora is a consultant to investment managers, JM Finn & Co


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