Time to return to Japan?

2011-06-12 10:33

London - Three months after the triple whammy of an earthquake, tsunami and nuclear disaster rocked Japan's economy, some investors and analysts are beginning to sense it may be time to return.

They are encouraged by low valuations, an over $300bn reconstruction bill, positive talk from the Bank of Japan and recent signs of a recovery at hard-hit companies.

Others are also relying on a recovery in Japan having a broader, global effect by helping bring the world economy - and with it, riskier assets such as equities - back on track in the second half.

At the Reuters Investment Outlook Summit this week, Societe Generale's head of global asset allocation Alain Bokobza was effusive about the prospects for Japanese equities, seeing the Nikkei average up 18% to 20% over the next 12 months.

"Japanese equity markets are cheap," he said, "I love Japanese equities."

He argued that Japan was one of the only countries in the world likely to experience a V-shaped recovery because capital will be mobilised to overcome the triple-disaster damage.

Equities were also trading at just 1.1 times book value, he said, meaning share prices are only really reflecting what a company's assets are worth and not any future profits or growth.

There are others on the buyside who go along with this. Invesco Perpetual's Henley-based equities team, for example, is overweight Japan in its global investment mandates.

"We expect good positive returns from Japan," the firm's Japan specialist Tony Roberts said in a recent note

"It is trading at around book value, which suggests that the entire listed corporate sector cannot add value over and above the sum of its net assets ever again. This is nonsensical; it is valued far too cheaply."

Long way to go

Current market positioning, meanwhile, would suggest that being bullish about Japan has yet to become a consensus trade - sometimes a counter-indicator that encourages investors.

Reuters asset allocation polls at the end of May, for example, showed global allocations to Japanese equities at the lowest level since November. Japan's own domestic allocation was at its lowest since August.

On the bourse itself, the Nikkei is down around 7.5% for the year to date, dashing the hopes of those such as Goldman Sachs who had predicted - pre-disasters - that it would be one of the big winners of the first half.

It is down more than 9% from its pre-disaster level, although it is up 15% from the lows hit just afterwards.

This could imply that the disasters have been priced in, but not the reconstruction.

So investors looking for signs that Phase One (disaster) may be ending and Phase Two (bounce back) beginning will have taken succour from some recent comments from monetary officials and leading Japanese companies.

Speaking last week, Bank of Japan board member Seiji Nakamura was relatively upbeat about Japan's economic prospects, along with the usual caveats about complacency.

"Japan's economic recovery is expected to accelerate towards the latter half of the current fiscal year," he said.

Nakamura also said Japanese companies were gradually restoring output to pre-quake levels. This statement was underlined a few days later by Akio Toyota, president of Toyota Motors, who projects his carmaker's Japan output will be back up to 90% of levels seen before the March disasters.

The company says production at Toyota is returning to pre-quake levels faster than it anticipated.

Siren's song

Not everyone goes along with this, of course. There are plenty of arguments around that as primarily a trading nation, Japan is wedded to the global economy, and that if that is facing headwinds, then so is Japan.

Similarly, some investors believe they can get better value elsewhere given the strength of the yen and its likely weakening when recovery gets under way.

"We know it is cheap," said Charlie Morris, head of absolute returns at HSBC Global Asset Management. "(But) we can't find the drivers for change yet."

His funds, which do not follow benchmarks, hold no Japanese equities.

The biggest hurdle, however, may just be a feeling among investors that they have heard the story of Japan's imminent attractiveness for too long.

With Japan slipping in and out of recession, the Nikkei has been in downward trend since hitting an all-time high in December 1989. It remains 75% below that level even now.

By contrast, the US S&P 500 is up around 260% over the same period.

That said, there have been at least a dozen significant rallies in the Nikkei on its overall way down.

Could reconstruction be signalling another one?

  • magnus - 2011-06-14 07:44

    Allan Gray has also been caught short with their huge exposure to Japan, even prior to the earthquake/tsunami. That explains why their Stable Fund is the worst performing fund in its sector of 6 months, one year and even two years. Yet they continue to hold their shares in Japan and hope for the best......

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