Land of the rising fortunes
As the Western financial world collapses in
a chaotic series of credit crunches, bank failures and
government rescues, Japan’s caution, built over many
years of disaster, might now be paying dividends
BY HELEN BURGGRAF
With its failing banks, tumbling
house prices, crippling
debt burden and a
credit crunch, the Western
world is starting to look an
awful lot like Japan.
Over the 18 years since
the country’s financial
bubble first burst in 1990,
while the rest of the world
has enjoyed the benefits of
cheap credit and soaring
stock and property prices, it
has been sorting itself out.
So last month, as the
City and Wall Street reeled
from news of the Lehman
Brothers bankruptcy, the
sale of Merrill Lynch to
Bank of America, the AIG
crisis and the attempted
$700bn bailout of US financial
institutions, Japan’s
investors could take some
comfort in their relative
isolation and conservative
approach to investing.
This conservatism is
Japan equities vs indices
%
40
30
20
10
0
-10
Sep ’05 Mar ’06 Sep
Mar ’06 Sep
Mar ’08
Bid to bid, $, gross income reinvested. Source: Morningstar
seen as having spared
Japan’s financial institutions
from the toxic investment
products that contributed
to the West’s woes, and,
ironically, made possible
Mitsubishi UFJ Financial
Group’s bid for a stake
in ailing Morgan Stanley,
and Nomura’s for Lehmans’
European operations.
l Once bitten…
It is this same Japanese isolation
which, some experts
believe, many nervous
Western investors will seek
to profit from in the months
ahead. Even as the extent
of the potential effects of
the Lehmans collapse was
still being revealed, managers
of some Japanese funds
reported receiving inquiries
from investors in search
of a refuge.
One such manager was
Neil Edwards, who shares
responsibility for Société
Japan equities sector average
M’star IM EQ Japan
Sep
Générale’s SG Japan Core-
Alpha Fund, one of the
most successful of the offshore
Japanese funds.
“Our perspective
remains that Japan is relatively
isolated – though not
completely – from events
elsewhere in the world,
simply because its banks
have undergone their own
debt deflation for the past
15 years,” Edwards says.
“This has had a dire
effect on the Japanese
economy and left a deep
caution instilled in its banking
psyche. So our view is
that the Japanese banks will
prove to be less exposed
than Western banks [to the
recent financial problems
afflicting such institutions
as Lehmans], and other
forms of dodgy credit.”
Peter Lucas, global
investment strategist at
Ashburton, adds: “Japan,
especially longer term, looks
a very interesting proposition,
especially given what
is happening in the global
markets. If Japanese investors
begin to repatriate their
savings mountain – which
we believe they will do as
they respond to the currency
markets’ increased
volatility and narrowing
interest rate gap – then the
Japanese equity and REIT
markets could take off.”
l Tentative steps
Japan remains the world’s
second-largest economy
OCTOBER 2008 [www.international-adviser.com] INTERNATIONAL ADVISER 25
FUND SELECTOR JAPAN EQUITIES
behind the US, and it is still
home to some of the
world’s top companies. It
is also gradually – albeit at
a Japanese pace – making
progress in climbing out of
a hole not unlike that into
which Western nations
appear to be falling,
according to Nick Sketch,
senior investment director
of Rensburg Sheppards.
Sketch and others say
that this means its companies
are lean, mean and
cheap. A 12% fall in the
TSE1 Index (in yen) last
year, and 24% fall so far
this year, suggest just how
close to the bottom valuations
there are.
As if that were not
enough, Sketch notes that
although Japanese exports
to the rest of the world
may come under pressure
in 2009, the country’s proximity
to China – to which
it now exports more than
it does to the US – represents
a potential engine
for long-term growth, as
well as a counterbalance
to continuing deflationary
forces at home.
“
Japan is relatively
isolated – though not
completely – from
events elsewhere
in the world, simply
because its banks
have undergone their
own debt deflation for
the past 15 years
”
Neil Edwards, fund manager,
Société Générale
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