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 US 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 GROWTHL:
"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 J. P Morgan.
"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 US 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 US 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 US 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.
Comments
Comments are closed.