Buy Japan cheap before the rebound
By
Senior Writer
Jody Clarke
Aug 15, 2008
Hopes that Japan could remain entirely untouched by the global financial turmoil were always unrealistic. And now a raft of grim economic data has pundits predicting that the Japanese economy could even be heading for recession. In July, the government cut its economic growth forecast for the year to 1.3% from 2%, a month after the unemployment rate jumped 0.3% to 4.1%. Meanwhile, exports fell 1.7% in June from a year earlier – the first annual fall in nearly five years – as demand from the faltering US consumer dries up.
But while the outlook is cloudier, "it's nothing like 2001, 1998, or 1993", Richard Jerram, chief Japan economist at Tokyo's Macquarie Securities tells Bloomberg. There are still plenty of things to be positive about. Despite the rise in unemployment, the jobs-to-application ratio rose to a 16-year high of 0.91 in June, suggesting that everyone who wants a job can get one. Seven years ago, during the last recession, there were two hopefuls for every job.
Meanwhile, capital investment by companies is expected to rise by 4.1% in the year to March. That's slower than last year's 7.7%, but better than the 10% drop seen during 2001 recession. Falling oil prices will also help Japan by driving down costs for firms. Plus Japan looks "as far removed from the credit crisis as anyone'', says Hewitts, the pension consultant.
"From a share-price perspective, Japanese banks appear to have disconnected from Western banks," writes Stephen Harker of SGAM in Investment Week. Since mid-March, they've "been leading the market as their relative immunity to the crisis has become evident". And if credit is the life-blood of capitalism, then Japan is pretty much the only place it is currently flowing. While most global banks are hoarding cash and tightening up lending criteria, Japanese bank lending rose at an annual rate of 2% in July.
Regardless of the economic backdrop, Japanese stocks are cheap. A full 60% of small caps now trade below book value, says Tadahiro Fujimura of the Sparx Japan Smaller Companies Fund in Barron's. "At 13.1 times trailing earnings, p/e ratios are historically low; while smaller-company stocks yield 2%, versus a benchmark bond interest rate of about 1.5%." What's more, "most negative news has already been factored into smaller-company stocks, so their prices are definitely poised to rebound." You can't buy Fujimura's fund in Britain, but there are lots of others to choose from.
Investments trusts look particularly good, with historically wide discounts. We like Baillie Gifford's Shin Nippon Investment Trust (LSE:BGS), up 9.1% over five years and trading on an 11.4% discount; and its Japan Investment Trust (LSE:BGFD), up 42.3% over five years and on an 11% discount. Another option is Fidelity Japanese Value (LSE:FJV), up 16.9% and on a 13.9% discount.
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Jody Clarke
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