View more on these topics

The emperor&#39s new clothes

The last quarter has beena difficult period for investorsin Japan as they

have seenthe themes which were so prevalent in 1999 fail dismally in 2000.

The darlings of the New Japan era crashed spectacu-larly in March, with

stockssuch as Hikari Tsushin andSoftbank producing very disappointing

earnings&#39 news.

Given the scale of the rises seen in 1999, especially at the small-cap end

of the spectrum, we should not be surprised by the retrenchment witnessed

in recent weeks.

The alarming news for domestic Japanese investors is that, as happened in

the great Japanese market bubble of the late 1980s, they have been the ones

most heavily hit by the downturn.

There are other echoes from the recent past as the accounting tactics used

by Hikari Tsushin also smack of old Japan.

Jardine Fleming Japan OTC trust manager Jonathon Dobson is aggrieved by

the actions of Hikari Tsushin. His dismay revolves around the creative

accounting employed by the company, whose chief executive failed to

appreciate the impact of implying a profit but delivering a loss.

From any perspective, the handling of this issue has been insensitive and

is largely responsible for the huge retreat of many of the new Japan

stocks. Hikari Tsushin itself will be blacklisted by domestic investors,

who are unforgiving when this type of thing happens.

This is a major setback for new Japan as a whole and it will take time

before this part of the market recovers its composure.

Data from Japan indicates the country&#39s economy contracted during the

fourth quarter of 1999, pushing Japan into a technical recession.

However, inadequate data has brought short-term con-fusion and Baillie

Gifford Japan fund manager George Veitch remains unconvinced, anticipating

a strong rebound this quarter. Going forward, he expects Japan to see a

cyclical recovery led by strong industrial production and increased capital

investment.

There are clear indications the Japanese economy has staged a further

recovery in the first quarter of 2000, which is expected to carry through

into the second half of the year. This has positive implications for

corporate earnings which should provide some comfort to investors.

From here, though, most fund managers expect to see further bouts of

volatility generated by foreign investors, who account for a large amount

of daily stock turnover.

There is increasing scepticism on the part of fund managers about the pace

of restructuring in Japan. The real problem is the companies that genuinely

need to restructure are failing to do so.

In terms of the Japan-invested funds covered by Forsyth Partners research,

the portfolios of Jardine Fleming have been the most affected by the

sell-off in the leading internet stocks as they were the most heavily

exposed.

We always remind investors that the Fleming and JF vehicles are defined as

aggressive and the volatility associated with holding them is a function

ofthe fund. JF is very much a bull market manager.

By contrast, the Schroder Japan fund has been a significant outperformer

during this sell-off phase, having underperformed in the run-up.

The Baillie Gifford Japanese fund is now available to investors under the

Oeic structure and allows access to one of the most competent and complete

Japanese investment teams. The long-term track record is impressively

consistent.

Martin Currie Japanfund manager Michael Thomas points to a number

ofpositive signals, with the lat-est economic data encour-aging for

continued corpor-ate profitability.

Indications are that GDPfigures are going to be good for the first

quarter. There are clear signs of an increase in private capital

expenditure and spending on technology.

The expected flood of cash into equities and funds from maturing 10-year

postal savings accounts has not yet materialised. The expectation was that,

with interest rates at historically low levels, investors would be looking

for alternatives.

It may still happen but Thomas believes it will bea longer-term trend, not

a single-quarter phenomenon – the same trend as we are essentially seeing

in parts of Europe.

A catalyst will be the introduction of Japan&#39s equivalent of the 401(k)

pension plan, Perpetual Offshore Japanese growth fund manager Paul Chesson

is convinced that the recent rotation in favour of cyclical and basic

industries cannot be justified by underlying fundamentals in Japan.

He says the economic growth will be driven by information technology

spending and the effect of the internet over time will be to bring greater

transparency to all sectors of the economy.

The new productivity-led growth will therefore continue to present a

favourable environment for Japan&#39s blue-chip growth stocks.

His view on the yen is consistent with a weak but ultimately floored

economic recovery overall. Poor public finances, rising fiscal deficits,

and weak growth relative to the rest of the world remain clear negatives

for the currency.

He also argues that the Federal Reserve in the US is determined to slow

growth in 2000 and the current account will be a beneficiary of this move

Although GAM Japan fund manager Paul Kirby is positive for the Japanese

stockmarket going forward, he expects the ride to be difficult for some

time ahead.

As in the US, he argues, it simply does not make sense to buy the old

industries in Japan such as steel and chemicals. They lack any investor

recognition in the new world which is likely to emerge in the next three

years.

The group will continue to support telecommunications, technology,

software, healthcare, specialist retailers and selected financial services

where growth is both structural and cyclical.

The implications for investment strategy are very clear. The new Japan

theme will continue to dominate portfolios into 2000 although the degree of

divergence between the old and new should diminish as more corporations

restructure in favour of the new model.

Furthermore, investment trust launches in Japan are increasing as managers

seek to gain funds from the anticipated outflow from postal savings, which

should provide some support for the market.

Recommended

&#39Low interest losing savers £1,000 a year&#39

IFA Chase de Vere says the averageUK household is losing out on nearly£1,000 each year by investing in low-interest accounts.It says top savings accounts pay over7 per cent a year while the averageaccount offers only 2.9 per cent.The company reveals the loss of interest in its new Savers Guide whichpoints out potential pitfalls to investors […]

It won&#39t do for the watchdog to bark for the FSA on mortgages

The Financial Ombudsman Service wants to bring mortgage advice under itsremit, if it can afford to.This throws the FSA decision to exclude advice into sharp relief andintroduces all manner of unwelcome anomalies.At best, it shows the current approach to mortgages is no better than abodge job, only serving to confuse the industry and public alike.But […]

IF&#39s E-loan link to offer proof of best advice

Halifax&#39s new telephone and internet bank Intelligent Finance is planningto offer mortgage brokers point-of-sale compliance from July.The company is to useE-loan&#39s mortgage search software following lastweek&#39s announcement of a strategic alliance between the two companies. IFsays IFAs will be able to evaluate the market before recommending the bestmortgage.This would guard against any move by the […]

CPD programme to set competence standards for LTC

Savers who open an account with Cheltenham & Gloucester before July 31will be given two free tickets to any National Trust house or garden. C&Gwill also donate £1 to a National Trust coastline campaign for each accountopened.Trade bodies Sofa and IFA Care are teaming up to develop a continuingprofessional development programme to establish minimum competence […]

How QE is distorting the gilt market

By Mike Riddell The moves in gilts in August were truly exceptional. Volatility in the gilt market (based off 10-year gilt futures) has soared to close to the highest levels seen this millennium, on a par with the eurozone debt crisis of 2011/12 and behind only the global financial crisis of 2008/09. The first distortion […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment