ON THE RISE?
Andrew Wahl. Canadian Business. Toronto: Summer 2005.Vol.78, Iss. 10; pg. 129, 1
pgs
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Abstract (Document Summary)
With signs of a slowdown in Asia and the Americas, it will probably be a rough six
months or so for the Nikkei, extending its losing streak through April. But as with many
things in Japan, much more lies beneath the surface. After long and painful
restructuring, corporations have achieved three consecutive years of profit growth and
now boast healthy balance sheets, withimproved free cash flow; in the 1990s, return on
equity peaked at about 3%, but it's now as high as 10%. Value-based investment
managers are finding stocks trading at a discount to cash on the balance sheet, and
some companies are buying back stock, like conglomerate Sumitomo Corp., or
increasing dividends; payout ratios could double to 30%. Along with the return of
inflation, that could be enough to finally reignite Japanese interest in investing.
Full Text (699 words)
Copyright Rogers Publishing Limited Summer 2005[Headnote]
Japan at last shows signs of life
As economies go, Japan always has been a bit of an odd duck. Since the market bubble
burst some 15 years ago, it has suffered from chronic deflation, moribund real estate
values, very high domestic savings rates and a malformed banking sector saddled by
non-performing corporate loans. It also faces a growing demographic crisis in its aging
workforce. Its saving grace has been exports of consumer goods, in particular
electronics and automobiles, and it has relied on the comfort of strangers-foreign
investors control much of the Japanese stock market. The result is an economy and
stock market that ebb and flow based on the global economy, especially consumer
spending in the United States and, increasingly, China.
With signs of a slowdown in Asia and the Americas, it will probably be a rough six
months or so for the Nikkei, extending its losing streak through April. The economy
seems stalled, and has perhaps slipped back into recession (although economic data in
Japan are notoriously susceptible to revision). Annual GDP growth will likely remain only
about 1% beginning this year through the remainder of the decade. The good news is
deflation may end as early as a year from now, according to the Bank of Japan's semiannual outlook, released on April 28.
But as with many things in Japan, much more lies beneath the surface. After long and
painful restructuring, corporations have achieved three consecutive years of profit
growth and now boast healthy balance sheets, with improved free cash flow; in the
1990s, return on equity peaked at about 3%, but it's now as high as 10%. Value-based
investment managers are finding stocks trading at a discount to cash on the balance
sheet, and some companies are buying back stock, like conglomerate Sumitomo Corp.
(TSE; 8053), or increasing dividends; payout ratios could double to 30%. This is partly a
defensive manoeuvre: in a couple of years, new regulations will allow foreign
acquisitions of Japanese firms by stock swan.
Along with the return of inflation, that could be enough to finally reignite Japanese
interest in investing. Banks have been net sellers of equities, as they unwound complex
cross-holding share structures. According to John Millar, an Edinburgh-based portfolio
manager with Martin Currie Investment Management Ltd. who manages the BMO
Japanese Fund, insurance companies' holdings include only 5% domestic equitiesleaving lots of room to grow, if the incentives are right. "On a three- or four-year view,
that is potentially very exciting," says Millar.
Likewise, Pauline Lee, a Hong Kongbased manager of the Investors Japanese Equity
fund, is keen on the financial sector's efforts to sell fee-based investment vehicles in the
domestic market. Millar is also watching Orix Corp. (NYSE: IX), a leasing company that
has become a leader in securitization and off-balance-sheet financing, as a good
medium-term story.
Another area tied to the financial sector is real estate. Residential prices in central Tokyo
rose last month for the first time in 15 years, and are approaching London and New York
levels. But real estate could still be relatively cheap, according to Rehan Chaudhri, who
manages two global CI funds with Altrinsic Global Advisors in Stamford, Conn. "We think
there are interesting structural issues where assets have gotten undervalued," he says.
Chaudhri expects homebuilder Daiwa House (TSE:1925), with a market cap of about
US$6 billion and US$1.7 billion in cash, to reward shareholders with a buyback or
dividend.
And what about Japanese exports? Lee points to office equipment maker Canon (NYSE:
CAJ), while Chaudhri is tracking automaker Honda (NYSE: HMC); if its share price gets
pushed below US$20 this summer, the automaker is very attractive. Millar, however,
says his firm is very cautious about technology exporters. "Whereas in North America or
Asia technology can be regarded as a growth cyclical, in Japan we would call it a more
regular cyclical," he says. "Asian companies have been able to Hoover up a lot of the
growth, so the Japanese companies find themselves in fairly commoditized areas." In
Japan, it seems, nothing is ever simple.
IF JAPANESE BANKS AND INSURERS START BUYINGEQUITIES5THE MARKET
COULD SHIFT
At a Tokyo shrine, praying for a good year