Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Edward Cartwright, Japan hedge-fund analyst at KGR Capital
Watching recent events in the global markets, I have come to a couple of conclusions.
The first one is increasingly obvious: ordinary punters should never think that City guys with fancy titles are any better at investing than anyone else. The sad truth is that the majority of those who profess to analyse the market are doing the job because they couldn’t cut the mustard as traders, salesmen or fund managers. Few have ever been responsible for committing company capital to their ideas – or indeed their own money.
It wasn’t just Bear Stearns’s hedge funds that took analysts by “surprise”. Several highly rated “five-star” funds blew up. It may be that there were talented people analysing those funds and predicting their demise, but if there were I never saw their research and I am not sure anyone else did. When it comes to Northern Rock, ditto. In hindsight, it looks very odd that the bank increased its net residential lending by 55% in the first eight months of this year, particularly given its low level of deposits and increasing dependence on the credit markets for its finance. But I’ve scoured my Bloomberg for research reports that highlighted this. I can’t find any.
The second thing the crisis makes clear to me is that you should underestimate Asia at your peril – but not expect Japan to recover any time soon. The way that the Asian markets have behaved, after initially being marked down in line with western markets, is very interesting. With the stark exception of Japan, all Asia’s markets have risen nicely in recent weeks – with those connected to China doing particularly well. Yes, the first signs of inflationary pressure are beginning to form in China, but growth is very compelling and the government’s policy initiatives this year are logical first steps on the road to opening up their closed markets. Having watched Japan close up in the 1980s, I think I know a serious bubble when I see one. And while you could see local Chinese markets in such a light, there are key differences between China now and Japan then.
Japan never grew at 10%-plus even when it had its brief mega-boom moment, and palaces in Beijing never became as valuable (theoretically) as the state of California, ie, valuations of key asset prices in China today are nowhere near as nutty as they were in Japan in 1989. China will undoubtedly run into nasty problems digesting this extraordinary growth and massive structural change at some point. I just don’t think that the time for that is now. Instead I think it – and the markets around it – will just keep growing.
Japan, on the other hand, continues to look like a basketcase. The dichotomy is incredible. Local retail investors have sought refuge in foreign assets and anything with a meaningful yield. Now the foreigners, the guys who supported the market for so long, are beginning to follow suit and look for the exit. They bought ¥5trn worth of stock in the first half of 2007, but have sold ¥1.2trn in the second half already. I can’t see any way that interest rates will rise markedly any time soon.
The urban regions are still in recession and I would expect to see the spectre of deflation being discussed again in the not too distant future. In our fund, we reduced our exposure to Japan significantly over a year ago and it is now a little more than 10% of our holdings. Those with an interest in Asia would be well advised to proceed with similar caution.