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Value judgement

It is always important for first-time investors to get off to a good start. Formative experiences are often full of harsh lessons and it can be easy to become disillusioned.

My first investment was Japan. I know what many of you are thinking – that market has been a disaster. Yet I am now in my 50s, so my first investment was made in the early 1980s when Japan was the most exciting stockmarket to invest in. After six months, my initial investment was around 50 per cent up and I was hooked. Unfortunately, since 1989, Japan has largely been in a bear market. It became an investment graveyard for many, fund managers included.

It certainly tests your conviction to invest in an area that keeps letting you down. However, dare I say it, things might be changing in Japan.

Well that is what Invesco Perpetual Japan fund manager Paul Chesson thinks anyway. To his credit, Paul has been one of the biggest bears in the market ever since I have known him, so when he told me he had turned bullish on Japan and invested much of his own money in his fund for the first time, I sat up and took notice.

Paul has no great faith in the Japanese economy and acknow-ledges the many problems relating to public debt and an ageing, shrinking population. However, everything has its price and he believes share values have got to a point where the bad news is fully reflected. When I asked him if he would change his view if the market fell further, he said no, he would just put more money in.

Perhaps it is just as well that he is looking at this from the point of view of stock valuations, as Japan’s growth has again disappointed this week and China has just overtaken it as the second-biggest economy in the world. However, you can see what Paul means regarding value when you consider that 65 per cent of the listed securities are below book value. Even Toyota, a world-class brand, is trading at around 10 per cent below net assets and is on a price/ earnings multiple of around six. In anyone’s book, this looks cheap and it is an interesting stock despite the damage to its reputation caused by the recent defective brake problems.

In addition, Paul believes many Japanese companies have made overly pessimistic forecasts for 2010, anticipating that improve-ments on 2009 figures were unachievable. He thinks they have beaten these low expectations in many cases.

Despite the strength of the yen, companies are still performing exceptionally well and while a double dip would severely hamper the Japanese market, he does not believe this will happen. He describes the global economic picture as “a recovery with soft patches” and although worries concerning a return to recession abound, the market already has remarkably low expectations.

Although Paul Chesson’s long term record is admirable, the fund has struggled in recent months. Defensive stocks such as pharmaceuticals and utilities have been outperforming and there are few of these in his portfolio. He believes these are now expensive and sees better value in financial stocks such as Nomura, which he thinks are exceptionally good value and offer a good level of upside potential. He also favours good quality real estate business, especially those exposed to commercial property.

Mark Dampier is head of research at Hargreaves Lansdown

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