Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Mark Fawcett, manager of the Thames River Japan fund
The Japanese stockmarket has been unloved and underowned by foreign investors for many years. But now many commentators are beginning to sound more positive about Japan. With the Japanese stockmarket continuing to outperform the rest of the world, I believe the current climate offers excellent upside potential for investment.
There are several good reasons to expect a turnaround in Japan's fortunes; these include strong buying by domestic investors; a robust currency; reasonable company valuations; strong corporate earnings growth; and share buybacks. On top of all this, corporate governance, risk control and the political situation have all significantly improved.
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Markets are currently discounting a further downturn in Japan. But the reality is that the downside risk is much higher in other Asian markets, where stocks remain overvalued. I also believe that Japan offers a good play on the global economy, in particular the theme of emerging market infrastructure. It is also relatively immune to the "US contagion", given the lack of participation on the part of Japanese banks in US sub-prime debt. In fact, it looks as though financial stocks in Japan have been unfairly marked down, given this limited exposure to sub-prime.
In March, Japan was just about to hit the bottom, but investors showed little interest, in my view a contrarian buy' signal if ever there was one. By mid-June, the Topix was up 24% from the low. On a one-year view the trends now in place are likely to continue in particular rising bond yields which are causing domestic investors to switch from bonds into equities. This has only just started but investors are now advised to reduce all underweight positions in Japan and go overweight.
As bond yields continued to rise through May, banks and other financials underperformed, consolidating the strong gains of April. In the Thames River Japan Fund, we have continued to buy on this weakness, and this has paid off as the stocks came back with a vengeance. With the Tokyo consumer price index (CPI) inflation for May coming in at 0.9%, which was higher than expected, and the inflationary trend firmly in place, I believe bond yields are likely to continue rising, which will further help our overweight financials position.
However, it is not all about the macro-economic situation. We have been using market weakness to accumulate positions in cheap, well-managed, growing companies in a variety of different sectors. I'd like to highlight our positions in Teikoku Piston Ring (Tokyo:6463), which rose 26% in May, and Musashi Seimitsu (Tokyo:7220), up 18%, which we added to the portfolio in April. These companies make car and motorbike parts, supplying growing parts of what one would imagine are difficult markets. TPR makes cylinder liners for aluminium engine blocks (whose penetration is rising due to demand for lighter, more fuel-efficient cars) and Musashi focuses on emerging markets such as Brazil where demand for motorbikes remains strong. Despite recent moves the stocks are both trading on below ten times earnings. The point is that there are still lots of good value opportunities in this market, especially in our favoured mid-cap space.
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