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The comeback country

In the May stockmarket correction, emerging markets and high-beta stocks were among the hardest hit by investors’ flight from risk.

But the developed markets did not escape unscathed and Japan was also among the worst affected. By early June, the Japanese Topix index had lost more than 17 per cent since its 2006 peak at the start of April.

Japan has been regularly tipped to be one of the best-performing markets over the next couple of years so investors now have to weigh up whether the recent sell-off is a buying opportunity or if there is more pain to come.

Fidelity Japan fund manager Robert Rowland believes the long-term outlook for the country remains positive.

Rowland says that despite the recent correction, the Japanese economy is in its fourth year of recovery, with factors such as an end to deflation, improved consumer sentiment and strong capital spending growth all contributing to the improving outlook.

He says: “We continue to find strong earnings’ momentum among beneficiaries of strong capital spending, improving consumer sentiment and reflation.

“Market consolidation should provide excellent opportunities to invest in high-quality companies at cheaper prices and our research continues to focus on uncovering long-term growth potential which is either underestimated or overlooked by the market.”

Jupiter Japan income fund manager Simon Somerville says that investors should look beyond the current volatility at the sound fundamentals.

He says: “In my mind, the fundamentals for Japan have not changed. Bank lending is still strong, as is the domestic economy and momentum continues in the right direction. Even corporate newsflow is good.

“Panic selling tends to mark the bottom of a correction and we certainly saw panic selling. The market now trades on 15-16 times prospective earnings so this is now cheap.”

Henderson global trust manager Alex Crooke says investing in Japan is a good way to minimise exposure to the slowdown in the US when investing on a global basis. He believes Japan’s demographic backdrop is further cause for optimism.

He says: “Many Japanese people are now hitting retirement age and unlocking their spending power. At the corporate level, that also means that as people retire, many companies are hiring new staff on lower salaries.”

“We are also seeing employment picking up and the current job offers to applicant level is the highest since 1992.

“Falling land prices and de-leveraging of the consumer have been the main causes of recession but both are now picking up. It has been cheap to borrow and invest in Japan and over the last two years net investment in Japan has come from overseas businesses,” he adds.

Bestinvest Communications director Justin Modray says the years of deflation have been a big obstacle to investors but he is optimistic about Japan’s prospects. He says: “On July 17, we saw the first bank rate rise for six years from 0 to 0.25 per cent, so these are positive signals after a long period of recession. Companies are healthier after a long period in the doldrums so those with a domestic focus should start to do well.

“Levels of private ownership in Japan is very low. If the economy does start to grow, we could see a major shift from cash into equities.”

Modray believes the change of prime minister in September is unlikely to have a profound change on the recovery as the favourite is believed to be looking to continue with Koizumi’s economic policies. He believes the Bank of Japan is more likely to be a significant obstacle to a full-scale recovery.

“There are issues over whether the bank is capable of managing interest rate rises carefully enough not to stifle growth. If they raise rates too quickly, it could have a negative impact on growth in the short term,” he says.

Resolution Asset Management Japan fund manager Stephen Hall sees Japan’s recent economic recovery as a self-sustainable domestic success story. He believes a key driver is the raft of solid reporting figures coming out of the corporate sector for the first quarter.

He says, on average, Japanese companies reported sales up by 9.9 per cent and operating profits up by 4.5 per cent in the first quarter year on year.

“The majority of Japanese companies have been very conservative in their reporting but now most have now raised their forecast,” he says.

Hall is confident that the pick-up is sustainable, noting that this is the fifth consecutive year of corp- orate profit growth.

“This is the fifth year of recurring profit growth. We have not seen that with Japan for 25 years so we are very positive for the future,” he says.

Newton Japan fund manager Neiloy Ghosh admits that the fallback in April and May was a nervous time for the fund although he is bullish about future prospects.

He says: “In April, we were nervous so we took our cash position up to 7 per cent. The problem was that companies in Japan were offering weak guidance for this year and foreign investors, who had been incredibly bullish on Japan, took a lot out in May and the markets collapsed.”

Ghosh believes that the cyclical nature of Japan’s economy over the last 15 years has led to an increase in volatility but there are signs that this pattern may now be changing as the threat of deflation recedes.

He says he has steered his 33-stock fund away from companies that have heavy US exposure and has positioned most of the fund in domestic-facing stocks to make the most of the recovery.


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