Buy Japan - 'be greedy when others are fearful'

Tipped by many (including us) as the market to watch for 2006, Japan's stockmarket is down a hefty 18% since 9 May as global markets slumped. But according to JP Morgan fund manager David Mitchinson in The Sunday Telegraph, this is no time to panic. "We think that, at this level, the Japanese market is attractive and on a mid-term view would prove rewarding. Warren Buffett argues that you should be fearful when others are greedy, and greedy when others are fearful'. There is a lot of fear in today's Japanese market."

According to Philip Whittome of Investec Asset Management in The Mail on Sunday, it is nervy foreign investors who have driven the sell-off. They own a quarter of the Japanese market, but "in recent weeks they have accounted for 45% of all trading". Whittome believes that Japanese equities should perform strongly in the long-term, citing the country's strong economic recovery and buoyant corporate profits. Indeed, first-quarter GDP has just been revised up from 0.5% to 0.8%, suggesting that full year growth will come in at over 3%, points out Merryn Somerset Webb, editor of MoneyWeek. And while exports account for about 50% of GDP in emerging markets economies, in Japan the figure is just 12%. That makes Japan more resistant to global growth shocks than other countries, as growth is led by the domestic economy, where consumption and corporate capital expenditure are up 13.9% on the quarter.

Paul Chesson, manager of Invesco Perpetual Japan, is more pessimistic. He argues that last year's 40% rise wasn't justified by the fundamentals, and that Japan's stocks are still overvalued. "If you think there is now a buying opportunity in Japan, then it means you think there is a buying opportunity in equities per se", he tells The Sunday Telegraph. "I believe that the Nikkei will have to fall to 13,000 [from its current levels around 14,600] before Japan is a buying opportunity."

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Yet most experts believe that a balanced portfolio should not neglect Japan. Mick Gilligan of Killick & Co, in the Sunday Telegraph, likes David Mitchinson's Framlington Japan Fund, a proven top performer. Paul Illot of Bates Investment, also in The Sunday Telegraph recommends Old Mutual Japanese Select and Schroder Japan Alpha Plus, whose performance has taken less of a hit recently because of its underweight position in banking stocks.

The Top Japan Funds

3 years to 01/06/06

Axa Framlington Japan 186.0%

Legg Mason Japan Equity 116.9%

Neptune Japan Opportunities 99.9%

Bailie Gifford Japan 98.3%

Baring Japan Growth 94.1%

Fidelity Japan Special Situations 86.3%

Standard Life Japan Equity Growth 82.4%

Old Mutual Japanese Select 81.3%

Gartmore Japan Index 80.7%

L&G Japan Index 80.3%