This year, the siren calls were distinctly lacking and yet a funny thing has happened. As I write, Japan is not only the best-perfor-ming major market of 2008 so far but it is also the only major market to have made positive money this year.
We are watching these tentative signs with interest, reflecting our strategy to overweight the Japanese market. We started 2008 with a mild positive view on Japan before steadily adding it from new cashflows. This position has been further strengthened over recent months as Japanese equities made further progress. We have been particularly encouraged by seeing that the Japanese market is capable of rising in the face of falling markets elsewhere.
Our own views have been given weight by the almost universal bullish sentiment in our recent meetings with Japanese fund managers. A glance at the latest Merrill Lynch fund manager survey gives a wider perspective. There is a clear move off the bottom in March for cash balances, economic growth expectations, earnings’ improvements and more. It looks like we, and our chosen managers, may have a head start on a sentiment change but what about the substance behind this?
An encouraging piece from KBC Securities that landed on my desk recently discusses the improving economic trend in Japan and highlights a possible catalyst for further outperformance by Japanese equities:
“Most notable is the second stab at Q1 GDP which shows that Japan was growing at an annualised rate of 4 per cent which was better than the previous quarter (+2.9 per cent), consensus expectations (+3.8 per cent), the first stab (+3.3 per cent) and all other major developed economies save Germany. According to The Economist, the consensus growth estimate for Japan this year is 1.3 per cent. According to Capital Economics, the Q1 knockout ensures 1.5 per cent GDP growth for 2008 even if there is no growth at all over the next three quarters … There must be a good chance of a tsunami of upward GDP revisions in the days and weeks to come. And there aren’t many countries of which you can say that.”
This consensus among Japanese specialists is not supported by global managers, leaving room for a change of view by investors. Further support comes from the fact that Japanese equities yield more than bonds – a very rare circumstance which has usually been followed by a rally in the markets well worth participating in. Furthermore, equities on average are trading below book value, unlike all other developed markets.
Last week, Mark Fawcett here at Thames River told us that this is about the first time in his 20-year career that he can buy sensible stocks at price-earnings ratios of below 10x.
The key to the market rising has long been said to be domestic buyers and there is some steady buying by trust banks and domestic pension funds, albeit at a low level.
However, our bullish managers fail to agree on favourite areas of the market, with differing expectations across sectors, market cap and economic areas of the market. We tend to diversification, anyhow, and are therefore happy to spread our investment across a number of funds including JO Hambro Capital Japan, Coupland Cardiff Japan, Thames River Japan and Jupiter Japan Income.
Will the sun continue to rise? From our perspective, it is a red sky tonight ahead of an all too rare delight for Japanese equities at sunrise tomorrow.
Robert Burdett is joint head of multi-manager at Thames River Multi-Capital