Mark Dampier: Japan - the land of the rising fund
Saturday 27 March 2010
If ever there was a flavour to the start of this year from investors, it must be emerging markets. I was reminded of this at a recent pension trustees meeting when the trustees suggested that, despite wanting a 3 per cent income, they thought most of the portfolio should be devoted to emerging markets. Eight or nine years ago, when I first suggested emerging markets, they would have run for the door – but now they want to fill their boots after the most glorious run.
I am not saying I think emerging markets are likely suddenly to crash, nor do I think valuations are absurdly expensive, but nor are they unbelievably cheap. I say this because, having come back from a recent visit to Tokyo with Neptune, I was again reminded of how unpopular Japan is, which is not surprising, given its 20-year bear market and more false dawns than I have had dinners.
It is easy not to be a fan of Japan. Her economy looks absolutely dreadful and debt has already reached 200 per cent of GDP, which is seen as a classic point of no return for an economy. Yet, as ever, Japan is a real dichotomy. While it may have big government debt, it also has a huge trade surplus and most of its debt is owned internally and, therefore, I suspect it is not such a problem as many suggest.
The nation's demographics are also appalling. Japan has more than 40,000 centenarians and this figure is rising by 5,000 a year. There are also more deaths than births, so on present trends, the Japanese population will cease to exist by the year 3000! Immigration will not come to the rescue of Japan's economy. The complexity of the language defeats many immigrants. Ageing populations are also not given to change. Indeed, the Japanese culture is very consensual in nature. Entrepreneurialism is frowned upon with many of the country's young unwilling to take risks.
Yet investors are not investing in the Japanese economy, they are investing in stocks. Chris Taylor, who manages the Neptune Japan Opportunities Fund, thinks there is a big opportunity. He believes the opportunity is in the multinationals, and this is where the bulk of his portfolio is. His only two domestic stocks are convenience-store operators.
The big multinationals are gradually becoming more and more detached from Japan and moving manufacturing bases to other regions in South-east Asia. The other point is that Japan has begun to realise that its near-neighbour, China, rather than the US, is becoming the more important region.
Japan is in an ideal position to prosper from South-east Asian trade, and its world-class technology is sought after in these countries too. The only thing that seems to be holding back a re-rating of many of the multinationals is the strength of the yen. Given the economic numbers, you would expect it to have weakened but, like everything else in Japan, nothing is as straightforward as that and the yen seems to defy economic logic.
Mr Taylor believes it is only a matter of time before the yen falls and he has hedged the Neptune fund against that. It is noticeable that on any yen weakness, the Japanese stock market, led by the exporters, does move up. It was also one of the best sectors in January and February and one of the few markets that has not really rebounded like others. Another fund manager said the market was "priced for failure", so perhaps that is the opportunity.
I am not sure Japan is a long-term buy and hold, but it will definitely offer more value than many other markets during the next couple of years. It is historically cheap by its standards and very cheap by world standards. Many of you might quote higher PEs at me, but this is not a particularly reliable valuation level at the moment, given the potential earnings fluctuations. I believe investors should be buying on the poor days in the market – and that is exactly what I am doing myself.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. He was a guest of Neptune on a recent visit to Tokyo. For more about the funds included in this column, visit www.h-l.co.uk/independent
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