Japan bounces but may still not be on the ball

COMMENT: `One explanation for the revival in recent weeks lies in the first green shoots of economic recovery, confirmed by an unexpectedly high rise in industrial output for November'
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The Independent Online
Is it different this time round or is what we are witnessing merely that traditional Japanese annual event - an unsustainable stock market bounce? For those who missed it, the Nikkei struggled through the 20,000 mark earlier this week, as it has done at some stage every year since 1992 - cold comfort for the former Barings trader Nick Leeson who back in February gambled the Nikkei would be above 19,500 at the end of the year. Unfortunately for him, it collapsed back down to 14,485 before the present recovery set in. Though the rise in the Tokyo market since its mid-year low point looks spectacular - nearly 50 per cent - this is nothing unusual by Japanese standards. Volatility comes with the territory in a market where the average dividend yield is less than 1 per cent.

One explanation for the revival in recent weeks lies in the first green shoots of economic recovery, confirmed by an unexpectedly high rise in industrial output for November. Government efforts to nurture growth seem finally to be bearing fruit. A second factor behind the unfolding confidence in equities has been the growing willingness of the Japanese authorities to own up to the extent of the banking crisis. The Bank of Japan has put a figure on estimated bad debts, closed down some no-hope financial institutions and set out plans for tougher monitoring of Japanese banks in future. Investors feel they now more or less know the scope of the problem and the nature of the solutions.

Underpinning all this are high liquidity levels - lots of cash chasing any investment prepared to pay more than a token return. Domestic investors figure interest rates can go no lower, leaving little scope for Japanese bond prices to rise. They are therefore allocating more to shares. Overseas investors too are increasingly confident both that the Nikkei has more scope to rise than key alternative markets - such as Wall Street - and that there is little danger of an adverse movement in the yen. The effect could be to push the Nikkei well above 20,000 before the new year is very old.

Whether such a bounce can be justified by the fundamentals - prospects for Japan plc - is another matter. It will be public sector pump-priming rather than private sector demand that drives the economy in 1996. Corporate earnings should improve, but not by a lot. Japan's transition, moreover, from a spectacularly high growth tiger-type economy to a disappointingly sclerotic one in need of very substantial structural change makes the present still-heady valuations enjoyed by Japanese shares relative to their Western counterparts look increasingly unstainable.

Markets rarely behave entirely rationally so it will take time for this underlying anomaly to correct itself. The stock market in Japan is in any case such an integral part of the financial and industrial system that the sort of correction implied by the relative valuation analysis would mean ruin for investors and bankers alike. There is therefore a powerful in-built resistance to any sustained further long-term fall in the market. The logic is nonetheless irresistible; the gap between Japanese and American valuations must progressively close.

Amstrad remains a one-man band

Amstrad always was a one-man band, and so long as Alan Sugar, chairman, is on this earth, always will be one. Yesterday's adverse stock market reaction to the abrupt departure of the chief executive, David Rogers, was therefore a curious one. If you invest in Amstrad, you are investing in Alan Sugar, not his lieutenant.

Nonetheless, the City plainly believed things might have changed. Three years of careful bridge-building with the City following Mr Sugar's ill- starred attempt to take the computers to telephones group private in 1992 have been undone. The removal of Mr Rogers removes the keystone in this edifice. As a former senior executive of Philips, he gave credibility to Mr Sugar's attempts to turn Amstrad from an entrepreneurial fiefdom into a serious international electronics group.

Plainly his ideas of rebuilding the core consumer business did not accord with those of Mr Sugar, who wants further to prune the business, eliminate loss-makers and cut costs to match reduced sales. Mr Sugar's instincts may be correct. After all, it was his gut feelings for what the consumer wanted which made Amstrad the remarkable success story it was in the mid- 1980s. Now he wants to take Amstrad off in new directions, stripping out the old activities and concentrating on new businesses such as the Dancall mobile telephone maker and Viglen, a maker of computers that sells direct to its customers.

While Amstrad works out its management problems, shareholders can rest reasonably assured the company's pounds 140m of cash and ownership of strongly- performing Viglen provide a floor of around 170p under the share price. Don't expect a business run on conventional lines, however. This is one of those stocks where the man is bigger than the company.

Supermarkets alight on electricity

When Marks & Spencer went into financial services, the banking and insurance world trembled at the thought of its potential market power. In the event, it did not turn out that way and the financial giants are fighting each other rather than the retailers. Chain stores and supermarkets can nonetheless still cause serious disruption when they enter new markets, as Tesco and others are demonstrating in petrol retailing. The latest industry to come within their sights is electricity supply.

In theory, any reputable company will be able to buy power from the electricity trading pool from 1998 and sell it to domestic customers through their existing meters. The regional electricity company distribution networks will become common carriers, open to any licensed supplier to use.

The mechanics of the move towards open competition are the responsibility of the electricity industry. Since no businessman in his right mind will go out of his way to encourage competition, it has been dragging its feet. Last summer it was criticised in a report by the Commons trade and industry committee for poor preparation for 1998. Professor Stephen Littlechild, the regulator has given the industry a kick and brought in consultants to steer the plans through. Initial responses are not encouraging.

There is to be a centralised clearing system to handle the billing of electricity supplied from the trading pool to the various competing companies, but this has already provoked a row. Some regional electricity companies believe the pounds 300m cost estimate is double what is required and are drawing up alternative plans. Since wholesale power prices vary through the day, this would be a complex project to get right at the best of times. But in this case there is a conflict of interest. The smoother the new arrangements work, the more quickly existing suppliers lose out to newcomers. Mmmm.

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