The uncertainty surrounding the extent of the Ministry of Finance’s generosity to inject liquidity into the markets has left Japan with an economy in a state of limbo. Estimates at how wide the Japanese government’s purse will stretch range from below ¥10trn to over ¥50trn ($40bn), and equity and bond prospects will of course be heavily influenced by this decision. But as yet the markets could move either way and market watchers are split as to whether Japan is going to recover and deliver some surprisingly healthy returns or if it is going to simply roll over and stagnate for the rest of 1997.
Jeff Barenburg, global strategist, Japan specialist at Merrill Lynch in New York sees Japan moving in a positive direction and is looking at a moderate rate of growth for 1998 with the Nikkei reaching the 20-23,000 mark by year end, though he remains dubious about the pace of governmental intervention to boot the Japanese economy as much as it needs. In particular, he fears the recapitalisation bill could be left by the wayside leaving a market in disarray. “If the bill is not passed the market could fall further,” he warns.
Boards one,two and three of the $88bn Swedish State Pension Fund in Stockholm has little exposure to Japan, with the market only comprising a portion of the 1.6% asset allocation to international fixed income. This is perhaps a good thing for the time being seeing as long term bonds are not expected to exceed 2% returns this year, according to some estimates, and Anders Palmer, chief economist, at the pension scheme is not too optimistic on the economy as a whole.
“We expect a very weak macroeconomic development and a very slow growth if there is any growth at all,” he says. “The authorities will probably have a little bit more expansionary fiscal policy and of course no tightening of monetary policy and very low inflation rates.” However, he is not worried about a market collapse, showing a greater degree of faith in the Japanese authorities than Barenburg. He feels there will be “no catastrophe at all as we expect that the authorities will take some action to improve the situation in Japan,” adding, “But of course it will take time before we can see the real effects on the whole economy.”
Andrew Hunt economist at Dresdner RCM Global In-vestors, however, sees a glimpse of light at the end of the tunnel, in particular the chances to be had in the equity markets with returns as remarkable of 25-30% for the investor who looks carefully. Following the government’s decision to use the money to underwrite the banking system on the condition that the banks underwrite the companies which are in trouble, the factor of bankruptcy risk has been effectively removed leaving uniform stock performance. “They’ve taken out all the possibilities of zero returns,” says Hunt. “You’re expected returns are all higher because the disaster scenario has been taken out. So you have a zero probability of making zero money.” Stock pickers therefore should look out for companies which have fallen behind until recently and are likely to catch up with the rest of the stock market. It will be in these areas that the returns will be best against an index which is not expected to see the better side of 10% in the next six months.
“Essentially it is a push-me- pull-you thing,” furthers Noel Mills, chief investment strategist at Barclays Global Investors (BGI) in London. “There’s clearly value in the market if you look at the historic low cash and bond yields. Obviously there is always a question about earnings going forward, but the perception is on the models that we run the earnings story is not so bad going forward as perhaps it looked earlier.”
BGI is steadily increasing its weighting to Japanese bonds moving from underweight to neutral signalling a degree of positive thinking, though as Mills points out, if the Ministry delivers a fiscal package greater than expected, Japan is probably looking at a GDP growth of 1-2% this year, and equities are likely to benefit but at the bond markets expense. “If the package surprises on the up side and by that a package greater than ¥10trn the equity market might continue to rally,” he says.
This could be a likely scenario following pressure from the US after the Japanese government delivered a “nominal ¥2trn” in income tax cuts last year, leaving a public feeling of ‘could do better’. “That didn’t cut much ice initially,” he says, “The perception was if they could do that, they can do more, and clearly there is pressure from the US and elsewhere to do a lot more.”
In terms of sectors Merrill Lynch’s Barenburg recommends blue chips, technology, general construction and brokerage houses, the latter two sectors also being favourites of Dresdner’s Hunt. Rachel Oliver