Shares: Catch the rebound in Japan

Above-average rewards in investment come from taking a view. As part of my general view that we are in a global bull market in bonds, which is going to be followed by a worldwide equity bull market, I think the Japanese index has bottomed and is forming the base for its next bull run.

This could be especially profitable for UK investors (who could buy a unit trust or quoted investment trust specialising in Japan) because of a 'double whammy' effect from a strong yen. Indeed, in sterling terms, Japan's Dow Jones index has already risen 20 per cent this year.

The four mainstream specialist investment trusts are GT Japan at 179p, Baillie Gifford Japan at 523p, Baillie Gifford Shen Nippon (specialising in smaller companies) at 101p, and Fleming Japan at 162p. The last offers warrants, currently 46p against a 12- month low of 20p, for investors who like an exciting ride. The advantage of investment trusts over units is that the shares now stand at discounts to underlying assets averaging about 13 per cent - though that can widen as well as narrow - and because dealing costs should be lower. With either choice, it might be wise to open a monthly investment plan, so if there is a further slide before the bull market the shares will be acquired at a low average price.

The unit trust route offers an overwhelming variety. I spoke to the manager of the Perpetual Japan Growth, which has done well from the recent rise in Japanese share prices. The fund is fully invested and the manager was extremely bullish - it could suit a similarly minded investor. Among investment trusts, GT Japan has been as much as 50 per cent liquid - a wise strategy until recently - and it is now reducing its liquidity.

There are striking parallels in the deep Japanese bear market with other great equity collapses - the 1929 crash in the US and 1974 in the UK. In all three cases we have had the unusual combination of falling interest rates, rising bond prices and falling share prices. The usual pattern, as seen here recently, is for falling interest rates to send shares higher. But when shares and interest rates fall together, the scene is set for a spectacular rebound. In 1975, UK share prices doubled from their low points in a matter of weeks. And Japan's bear market has also been unusually long - well over three years.

There are plenty of bear factors around. The most widely cited is that the only thing keeping Japan's stock market from collapse is a blatant support operation - heavy buying by public funds while institutional investors are instructed not to sell. The economy is in dreadful shape by Japanese standards with, at best, 1 per cent growth expected this year and company profits in free- fall. The bears also argue that, even after collapsing, shares are still on average p/e ratios of 50 to 60 and look absurdly expensive by Western standards. But a closer look finds the bearish factors less damning. Much of the market support operation is coming from long- term pension funds that have a tiny exposure to equities, relative to UK and US pension funds - so there is a good case for saying they should be buying shares anyway.

The average p/e for the market is distorted by huge ratios on cyclical recovery stocks and banks that are writing off bad debts. Many shares are on a p/e nearer 30, which may not look so ridiculous given one observer's view that Japanese companies are so sensitive to small changes in demand that even a whiff of recovery could see earnings doubling, and the p/e halving, in two years.

Other measures of value portray them as relatively cheap. Indeed, the recent rally has been led by NTT, the equivalent to BT, whose shares have soared from below Y500,000 to Y780,000, and which has been selected in a study by a US stockbroker as one of the world's cheapest telecommunication stocks, with the potential of raising profits sharply by hiking Japan's low call rates.

The final saving grace for UK investors is that they can be wrong about where the market is going but still make money from the yen's relentless appreciation against sterling.

Even with the crash, the Tokyo share index has risen by 630 per cent in sterling terms since 1981, compared with a rise of some 390 per cent by the FTA All-Share index over the same period.