With the yen poised to stay \u201cstronger for longer\u201d and a central bank that has been anything but aggressive, there are indications Japan\u2019s economic recovery will be weaker and slower than North America\u2019s.
Says Charles Edwardes-Ker, portfolio manager with TD Asset Management Inc. <\/b> in Toronto: \u201cThe Bank of Japan continues to be pretty prudent and conservative in its monetary policy compared with some other central banks, [for which] things have been far more aggressive.\u201d
Japan continues to struggle, says Mark Grammer, vice president, investments, with Toronto-based Mackenzie Financial Corp. <\/b> and portfolio manager of Mackenzie Focus Japan Class fund. The country suffers from an aging population, weak corporate governance that doesn\u2019t seem to be improving and a government that has been at a standstill despite a new party taking the reins last year.
Furthermore, the yen is expected to stay strong, which will not help the competitiveness of exporters.
\u201cIn the short term, it would be difficult to argue that the yen is going to weaken dramatically because all the negative attributes are well known,\u201d Grammer says. \u201cYet, [Japan\u2019s central bankers] haven\u2019t managed to move the yen in any weaker fashion.\u201d
The Bank of Japan expects real gross domestic product for the fiscal year ending March 31, to increase by only 1% to 1.5%, as the high value of the yen makes it harder for Japanese companies to compete abroad and at home against imports. The strong currency also reduces the profits on export sales when converted into the yen.
\u201cWhat is going to be driving growth is, hopefully, going to be some capital expenditures from companies,\u201d says Edwardes-Ker. \u201cBalance sheets are strong, with a lot of cash, and hopefully that will lead to an increase in capital expenditures.\u201d
There could also be some pickup in exports if U.S. growth accelerates and growth remains strong in China and other Asian emerging economies.
That would be good for returns on Japanese equity funds, which usually have a bias toward exporters. Fund managers like to tap into these companies, both for their exposure to growth that is stronger than that occurring domestically within Japan and for their ability to increase earnings despite the high yen.
\u201cEven with a high yen, corporate profits are still expected to increase by 18% for the year ending March 31, 2012,\u201d says Stephen Way, senior vice president and portfolio manager of global equity funds with AGF Management Ltd. <\/b>in Toronto, whose holdings include Keyence Corp. and Canon Inc. \u201cAnd if the yen weakens, then corporate profits will be expected to grow even more in 2013.\u201d@page_break@Using similar reasoning, Edwardes-Ker remains overweighted in Japanese industrials: \u201cCompanies in the industrial sector, particularly exporters, tend to be better managed because they are facing tougher international competition.\u201d
Edwardes-Ker\u2019s top holdings include FANUC Ltd., a leading supplier of robotic automation, and Nidec Corp., a manufacturer of electric motors
Grammer thinks industrials and automotive manufacturers could surprise inves-tors on the upside. \u201cA lot of companies have done restructuring,\u201d he says, \u201cin order to be competitive with the very strong currency.\u201d
Grammer\u2019s top holdings include Nissan Motor Co. Ltd. and Hitachi Ltd.
On the domestic front, Edwardes-Ker is underweighted in the consumer discretionary and financial sectors. \u201cWith interest rates remaining very low in Japan,\u201d he says, \u201cit is hard to see a big improvement in bank margins.\u201d
Instead, Edwardes-Ker prefers names strongly related to the environment, such as Matsuda Sangyo, a company that specializes in the recycling of precious metals and gold; its shares have a price\/earnings ratio of eight or nine times. \u201cJapan has a lot of technology and knowledge in this space,\u201d he says, \u201cso that is an area that we like to look at.\u201d
A new focus for fund managers is the housing sector. While Japan\u2019s residential market has been slow to recover, there is evidence that the condominium market is starting to improve. There are a variety of government incentives on housing, including environmental subsidies and subsidized 1% mortgages.
\u201cThere are some housing names that we are becoming quite keen on,\u201d says Edwardes-Ker, \u201cones that have really lagged in the past and are now getting support from government policy stimulus.\u201d
He holds Misawa Homes Holdings Inc., a company in which Toyota Motor Corp. recently took a 29% stake as part of the automaker\u2019s foray into the housing industry.
Both Way and Grammer prefer to focus on commercial real estate, even though there is no evidence yet of strong improvement. Improving vacancy rates have, so far, been offset by decreases in rents.
\u201cThe real estate sector has been very weak for such a long time and there is a lot of negative sentiment there,\u201d Grammer says. \u201cBut I don\u2019t think it would take much for that to turn. We can see vacancy rates going down, and that will drive the real estate stocks. As well, you can see a slight pickup in housing demand.\u201d
For Way, the decline in vacancy rates is a good omen for future profitability. \u201cI think [rents] are probably still going to decline for the next little while,\u201d he says, \u201cbut the rate of decline is moderating.\u201d\tIE<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
With a strong yen challenging exporters\u2019 profits, Japan can expect modest growth over the next year. But fund managers have found a few bright spots<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3018],"tags":[2403,2944,3212],"yst_prominent_words":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/316994"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=316994"}],"version-history":[{"count":1,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/316994\/revisions"}],"predecessor-version":[{"id":363278,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/316994\/revisions\/363278"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=316994"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=316994"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=316994"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=316994"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}