Why Japan is back on the radar
Japan could be described as full of Eastern promise as every few years it seems to promise great riches for investors. But invariably the promises are exposed as empty.
While Western markets have suffered from one lost decade, Japan is coming to the end of its second one: its stockmarket is only worth around a quarter of the value it was at the end of the 1980s. And while there have been occasional rallies - 2005 was a good year - these have quickly petered out.
The past few months have run according to a familiar pattern: the Topix index has risen 12% since its December low, while the UK and US markets are up 3%.
Investor interest is also rising: a survey of institutional investors' opinion showed a quarter of them view Japan as the most undervalued market and they will invest more.
Paul Chesson, manager of Invesco Perpetual Japan, thinks they would be right to do so. He is 'very optimistic' about Japan and expects a big bounce in corporate profits over the next year.
He thinks profits could rise by between 50 and 60% in the year to March 2011 - Japanese companies virtually all have the same year-end - with a decent rise expected the year after that.
"It's a combination of steady improvement in the global economy and cost-cutting by Japanese companies," says Chesson.
That would follow the pattern seen in previous recoveries: Chesson points to the sharp recovery in corporate Japan's profits that followed the last economic trough in 2003-04. "The trough this time has been deeper so the recovery should be sharper," he says.
Chris Taylor, manager of Neptune Japan Opportunities, is also bullish. He says leading Japanese companies have spent the past two decades building up activities overseas, particularly emerging markets.
As well as obvious global giants such as Sony and Nissan Motor, he cites lesser known companies such as Nidec, which makes motors for consumer products and has 85% of the global market, and Asahi Breweries.
While Japanese shares often look expensive, experts think the market is now good value. Chesson prefers to look at the ratio between share prices and the value of the underlying company's assets.
In Japan, share prices are around 15% above this book value and, he says, the huge balance sheet write-offs over the past two decades mean this figure can be believed. In the UK, the gap is 96% and in the US 115%.
Enthusiasm about shares does not mean enthusiasm about the Japanese economy. "I am not bullish about the Japanese economy; if anything I'm the opposite," says Taylor.
Also, Japanese politicians have proved inept at solving the country's problems. Simon Somerville, manager of Jupiter Japan Income, is encouraged by the fact the authorities let Japan Airlines go bust after bailing it out four times.
"That could be the catalyst to unlocking what may be a huge amount of value in the Japanese market."
Spotlight on Invesco Perpetual Japan
There is a wide divergence in the performance of Japanese funds. The best - Neptune Japan Opportunities - would have more than doubled your money over the past five years, while Legg Mason Japan was the worst, losing you 60%.
We are plumping for the second-best performer: Invesco Perpetual Japan. While the fund has been less stellar than the Neptune fund, it has been consistently ahead of its benchmark and fared particularly well during the recent rally.
Manager Paul Chesson favours large global companies in areas such as automotives and electronics.
He is also increasing his focus on domestic financial companies, where he is confident that balance sheet issues - mainly problem loans that had not been written off - have been dealt with, as well as property companies.
The five investment companies specialising in the region stand at high discounts to net asset value, as do the five vehicles that focus on Japanese smaller companies.
Performance has not been as good as the best unit trusts but if you are keen to take advantage ofhigh discounts consider Baillie Gifford Japan. Getting your timing right in Japan is crucial, so be prepared to sell when you have made a decent gain.
This article was originally published in Money Observer - Moneywise's sister publication - in March 2010
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Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).