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Return to traditional values

The split in the Japanese market between technology stocks and equities from more traditional industries is set to mend, according to equities strategists.
Glittering growth seen in high-tech, particularly internet-related, stocks should soon slow. Instead, investors will turn their attention to the cost-cutting achieved by businesses of the ‘old’ economy. And, despite recent market jitters, the fundamentals for corporate profits are still sound with Japan’s economy still on track for growth, strategists say.
However, economic data has been mixed lately, and some of the economy’s upwards momentum has appeared to be slowing, says Nick Read, senior investment manager at Gartmore in Tokyo. “The yen strengthening didn’t really help things, and with elections coming up the government’s desire to restructure has been put on the back burner.”
But the ministry of finance’s quarterly survey of business trends showed corporate profits could far surpass expectations, he says. “We believe the economy is likely to surprise with 2% GDP growth this year.”
Japanese companies are likely to give a positive outlook for profits when they report earnings in April and May, with cost-cutting showing real results, says Read. Because companies in Japan are highly geared, reductions in costs should translate into far greater growth in terms of earnings than would be the case in other major economies.
Positive news on corporate earnings in Japan will come largely from the old economic areas of industrials and banks rather than the new technology-led sectors. “This can only lead to a broadening out of the market away from dot-com companies,” he says.
Alexander Kinmont, Japanese equity strategist at Morgan Stanley, agrees that the differences in stock performance between tech and non-tech will be evened out over the next few months. While he sees the market gradually moving higher overall, there will first be a rotation away from the glamour stocks of the technology and telecommunications sectors, he says. “These stocks are overpriced and there are long-margin positions outstanding.” Investors will move instead into defensive stocks, and within the technology sector, the laggards will be favoured, Kinmont predicts. For example, NEC will attract buyers rather than Fujitsu.
Although she agrees many old economy stocks could benefit, Yukiko Kawamoto, head of Japanese equities at HSBC Asset Management in Tokyo, points out that old economy stocks are not all the same. “You have to be careful to select stocks, to judge which old companies are changing and which are not.”
She has particular confidence in basic materials stocks. Stocks in the petrochemicals sector, if successful with their restructuring programmes, could produce higher earnings than the market is factoring in, she says.
Kawamoto forecasts the TOPIX index will reach 1900 by the end of this year, from around 1,700 now, while Kinmont sees the Nikkei 225 trading in a range of 18,000– 20,500 on a six-month view, from just below 20,000 now.
However, Charles Lambert of Jardine Fleming in Tokyo, noted that while Japanese value investors have tended to be buyers of old economy stocks, arguing that the divide between high-multiple internet stocks and low-multiple value stocks has been unjustifiably wide. “US investors have driven up the SOX semiconductor_index by 70% and the BDK biotech_index by 90% year-to-date, and they still don’t want to switch into low-priced value stocks,” he says.
But not everyone is as optimistic for technology stocks. Recent volatility on the Japanese stock markets has rattled some asset managers. Read says the sharp drops seen in the share prices of some Japanese businesses may lead to some sobering up.
“I think what it does is highlight to people that in the new economy, it is not a straight path to riches... it will make people slightly wary of this type of area,” he says, referring to technology and telecommunications stocks which he says in many cases have never made a decent profit.
Kinmont says the real estate equities sector could be set for a boost this year. The second half of the year will see the introduction of a new investment vehicle – real estate investment trusts. In turn this is expected to lead to increased demand for property stocks. “Real estate stocks will rise... in the expectation of increased liquidity.”
Strategists are still waiting to find out what impact the outflow of maturing Japanese postal savings deposits will have on the market and the economy as a whole. The Japanese ministry of posts and telecommunications has said the outflow of funds from postal savings will be ¥27trn (e260.5bn) this financial year, and ¥22trn next. The first deposits will mature in April.
Because interest rates on deposits are so low, many in the market expect a proportion of the outflow to be invested in equities, giving prices a boost. Jardine Fleming’s economists expect about ¥4trn to flow into equities, debt securities and investment trusts. But even though the postal savings maturities will probably lead to a temporary disturbance in the flow of funds, upward pressure on long-term interest rates will be limited, they predict.

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