B4U India: Japan stocks to languish in emerging Asia shadow

Japan stocks to languish in emerging Asia shadow
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reuters india on 06 December, 2007 04:26:00
 
By Aiko Hayashi and Ian Chua
TOKYO/HONG KONG (Reuters) - Japanese stocks, the worst performers among major
global markets so far this year, are likely to continue struggling in the
shadows of booming markets and vibrant economies elsewhere in Asia.
Anaemic growth compared with red-hot China and India and a currency hamstrung
by the country's ultra-low interest rates are keeping the market below the
radar screens of both local and foreign investors seeking robust returns.
"The bulls will have to wait a little longer in Tokyo," said New York-based
Alec Young, equity strategist at S&P Equity Research.
The world's second-biggest economy is forecast to grow at just 1.8 percent in
2008 versus 10.8 percent for China and 9.2 percent for emerging East Asia,
according to a World Bank report in November.
Its currency, while susceptible to bursts of strength as investors unwind
popular carry trades in times of risk aversion, may have its upside capped by
chronically low interest rates and little prospect of aggressive hikes by the
Bank of Japan.
Masaki Iso, chief investment officer at Yasuda Asset Management Co Ltd, said a
stronger yen and the slowdown of the global economy had also hit Japanese
stocks especially hard as its economy is led by exports.
"Japanese stocks will likely continue to underperform until the global economy
cements the downside," he said.
Tokyo's Nikkei has fallen about 8 percent since the start of this year,
compared with gains of 48 percent for Hong Kong and a rise of around 5 percent
for the U.S. Standard & Poor's 500. The pan-European FTSEurofirst 300 is up a
modest 3 percent.
The contrast is even more stark versus emerging markets in Asia. Chinese stocks
traded in Hong Kong, for example, returned more than 70 percent over the same
period despite a hefty November pullback.
LOW GROWTH
"The issue in the Japanese economy is the level of nominal growth is very low
and that you've also got very low Japanese interest rates and tendencies to buy
other currencies," Adrian Mowat, regional strategist at JPMorgan.
"The trend is for Japanese savers to be buying things abroad where there is
higher growth, higher yield."
While the yen has gained against the broadly weak dollar, investors in most
other major currencies have seen stock market losses inflated by foreign
exchange moves. Unhedged euro investors have lost almost 15 percent
year-to-date.
Japan has the lowest interest rates among industrialised countries, with an
overnight call rate target of just 0.5 percent, spurring many domestic
investors to look for better yields elsewhere.
Japan is still a major market for Western fund managers in Asia, accounting for
more than half of their total investments in the region according to Reuters'
global fund manager polls.
But Japan's prominence has been slipping as other regional markets develop.
The polls show U.S. and European fund managers have more than doubled their
exposure to other Asian markets in the past year.
Up to late November this year, investors have pulled out more than $16.7
billion from equity funds geared to Japan, said EPFR Global, which tracks
global fund flows, compared with a record net inflow of more than $30 billion
for emerging market equity funds.
CHEAP?
While Japan may now be trading at a discount to other developed markets in
Asia, it is still at a premium to its U.S. and European counterparts.
MSCI Japan trades at about 15 times 2008 earnings, versus 16.7 times for MSCI's
index of other Asia Pacific stocks, 14 times for the U.S. market and 12.2 times
for the pan-European average.
Projected earnings per share growth for Japan is about 10 percent, in line with
Europe and well below 15 percent for the United States.
"So when we look at it that way, it's still an expensive market," S&P's Young
said.
But pockets of value are starting to appear.
"What our team here has been doing is from a very, very underweight position in
Japan, it has been adding some money back," said Khiem Do, head of Asian
multi-asset investment at Baring Asset Management.
Do said his team was looking for opportunities in small to mid-sized stocks
which had been "bashed over the last 18 months."
Patrick Mohr, a strategist at Nikko Citigroup, said he liked blue-chip
exporters, including electronics and machinery companies and automakers,
because they are exposed to stronger growth outside Japan, and deeply oversold
banks.
Yasuda Asset Management's Iso said he is bullish on shippers, trading firms and
machinery makers such as Komatsu Ltd because of their exposure to emerging
countries and their solid valuations. He is bearish on domestic-demand-reliant
shares such as retailers as their domestic growth is weak.
Others like Swiss bank Lombard Odier Darier Hentsch like multinational firms
that are exposed to the region's booming economies such as Sony Corp and Sharp
Corp, which were among its top picks.
"We're ready to get more positive on Japan, but not ready to do it yet," S&P's
Young said.