Focus on Asia – Japan polls well among managers

Japan’s prime minister Yoshihiko Noda has called for elections next month, but managers such as ING Investment Management have already voted in favour of boosting equity holdings from the country.

ING IM said that although the local stock market overall has lagged others’ recovery since the Lehman Brothers crisis, because of fears over recovery in earnings, there is in fact significant potential from individual companies that has not been recognised. This therefore positions many equities as attractive investment opportunities.

One reason for the decoupling between market performance and company performance has been the strong yen. Investors might believe that it has harmed sectors such as car making and steel. However, this is not necessarily the case, and ING IM believes that share prices could rally if the market overall changes its view.

Natural disasters in both Japan itself and subsequently Thailand hit a number of Japanese companies hard. However, while this may have increased the perception of geographic risk in investors’ minds, the probability of such events – such as flooding in Thailand hitting production facilities of Japanese companies in that country – make them highly unlikely to repeat any time in the near future.

Meanwhile, Japan simply remains the market most investors like the least. The level of underweight is the biggest it has been in a decade, ING IM said.
But, investors should remember that this situation can reverse quickly, as it did in 2003-5, when the market attracted some $200bn. The technical analysis also suggests that investors could benefit from investing now, while valuations remain low.

About 70% of listed companies on the Tokyo Stock Price Index (Topix) trade below book value. The average P/E currently stands at around 12x, after a number of years in which share prices have lagged improving earnings – the average P/E stood at 20x a decade ago.

Finally, the local stock market could benefit from recent changes to monetary policy, with the Bank of Japan recently boosting its asset purchasing programme to counter deflation. If the value of the currency is cut by such policy, then it would boost the export potential of companies that have already learned to live with a more expensive yen.

Politics could give a boost to investors in other ways, added Bank of America Merrill Lynch in a recent Global Research report.

It said that the recently called election could see the LDP party put back in power, which would give a boost to those who want to push reflationary and pro-growth policies.

“We believe this would be JPY negative, equity positive and JGB negative. We think the best way to position is via the Banks in Japan rather than the more widely held exporters. Banks in our view have significant upside to the End of Deflation story in Japan and they currently trade at close to historic lows versus global stocks,” the report stated.

Added ING IM: “Even in the absence of help from the government, there are a significant numbers of large established companies achieving record high level of earnings by winning market share and/or expanding overseas, as well as fast growing small caps. Indeed an interesting time for stock pickers as well as bargain hunters.”

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