Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Simon Somerville, manager of the Jupiter Japan Income and Japan Select funds.
Recent political developments makes us feel that the Japanese are pushing their taste for the ‘fleeting world’ too far. During the past five years, there have been six different prime ministers, with Naoto Kan chosen in June to be the latest. Only a year ago, the Democratic Party of Japan (DPJ), under Yukio Hatoyama, won the general election by a landslide and looked determined to stimulate growth and squeeze Japan’s extensive bureaucracy.
But since then, the DPJ has suffered a sharp fall in popularity due partly to Hatoyama’s inability to deliver on his election promises. A change of prime minister to Kan and a defeat in the Upper House election followed. As if this was not bad enough, the DPJ then embarked on a damaging leadership battle, with former leader Ichiro Ozawa challenging Kan. Kan has won this vote but still has to unite his party.
Despite many firms beating earnings forecasts, Japanese equities have suffered from poor investor sentiment and the yen’s relentless strength. But being negative on Japan is now a crowded trade. The short sale ratio is at a record 30%; institutional investors are at almost unprecedented levels of pessimism. Japanese stocks now trade at, or close to, record lows on most valuation measures.
The catalyst to unlock this value remains politics. The Japanese government recently intervened to weaken the yen. I think the impact will be limited as it was done by the Ministry of Finance, with no effect on the Bank of Japan balance sheet or on liquidity. However, by this action, the government has put a line in the sand at ¥83 per US dollar. I believe this is positive for the market and should mean global investors start to re-evaluate how cheap Japanese stocks are. The market seems to offer many stocks with solid earnings prospects, yet very low valuations.
Nissan Chemical (JP: 4021), for example, has been hit by fears over weak demand for electronic materials. We believe these concerns have been overdone. The group has strong exposure to the defensive pharmaceuticals and agrochemicals sectors, which should not be affected by a slowdown in electronics demand. Even within its electronic materials unit, Nissan Chemical supplies a technologically advanced alignment film for Apple’s iPad. I believe this will underpin the company’s sales growth in the next couple of years.
Shares in Aeon Mall (JP: 8905) also have potential for further growth. The group develops and manages shopping malls, mainly for retailer Aeon, which holds 55% of the company. Like-for-like sales for its domestic shopping centres are improving, helped by stimulus measures and the record summer heat. Aeon is also expanding in China and other Asian countries. Moreover, the government has eased restrictions on Chinese tourists visiting Japan, which should boost consumer spending in Japan over the medium term.
Strong demand from China is also good for factory automation group Fanuc (JP: 6954). Fanuc is vulnerable to a global slowdown and the strong yen. However, nearly 50% of its sales are from China and other Asian countries.
The firm has a strong technological edge and should be able to compete effectively to benefit from growing demand for factories to be upgraded in the region. China has stepped up its drive to demolish old, energy-guzzling factories and replace them with more energy-efficient facilities, which should benefit Fanuc.