Natasha Chetwynd,head of Japanese Equities for Britannic Asset Management tells MoneyWeek where she’d put her money now.
In 2003, the Japanese market rose 23%. Then last year, it rose 8.5%. That’s the first time in a decade that the equity market has managed to stage two consecutive rises, and 2005 has also started well. It has been the domestic sectors, such as financials and real estate, along with small companies (which generally have a more domestic bias), that have driven this performance. The initial public offerings market has also been active, raising ¥3.66trn (around £18bn) in 2004, up more than 75% over the previous year.
Another notable development has been the rise in volumes, which, after many years in the doldrums, have now reached record levels, thanks to domestic investors returning to equities. What all this means is that structural changes in the Japanese economy are finally beginning to have a positive impact.
Our largest and longest-held overweight positions in Japan remain in the financial and asset-related sectors of the market, where valuations remain cheap, and where we still expect significant upside. However, more recently we have been raising our exposure to some of Japan’s best exporters, as the recent slowing of global growth seems to be bottoming and many of these companies (especially technology-related ones) have been underperforming for a long time. Consequently, of the three stock ideas we give here, two are financials and the third is a component manufacturer.
As the largest bank in Japan, Mizuho Holdings (ticker 8411) has been among the slowest to cut costs because the integration of its constituent parts was more complex than expected. The integration is only just complete, but from now on it should be pursuing a more forward-looking strategy and developing its distribution strengths. We are expecting good profit growth now that it has finally written off its non-performing loans. This should lead to a rapid improvement in its financial position as it uses its profits to buy back the preference shares it issued to the government at the height of Japan’s financial crises. Given all this, the bank – now one of the cheapest major banks – looks worth buying.
Another firm to consider in the financial sector is Mitsui-Sumitomo Insurance (8752), one of Japan’s top three non-life insurance companies. The market for insurance policies is quite mature in Japan, but MSI has been expanding its Asian operations in recent months – it bought Aviva’s entire fast-growing Asian business, for example. Furthermore, the firm trades at a very steep discount to its bookvalue – we expect the shares to rise to close this gap as MSI starts to buyback shares in the summer and the market sees the potential of its Asian business.
Finally, Murata (6981) is one of Japan’s top makers of electronic components. The company’s products are used in areas such as mobile phones and home appliances. Recent months have been difficult for component companies, as oversupply has led to production cuts and falling prices. However, Murata has fared relatively well. The company places substantial emphasis on research and development, so many of its products are ‘high-end’ and thus less exposed to pricing pressure. The inventory correction that took place in 2004 looks to have run its course, and orders may now begin to recover in line with the global economic recovery. If this happens, Murata will do well.