Sun, Aug 11, 2002 page11

• Analysts say Japan may be worth a look

  • NY TIMES NEWS SERVICE
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  If all the surprises to hit investors of late, one of the most curious is that Japan is home to the best-performing major stock market this year. While America's benchmark index, the Dow Jones industrial average, has plunged nearly 13 percent, its Japanese counterpart, the Nikkei 225, has held up relatively well, growing 3.9 percent in dollar terms this year. Though slender and partly inflated by the yen's rise against the dollar, these gains suggest that Japan is worth a second look for those willing to venture overseas to broaden their portfolios.

  As in past years, Japan's stock market has taken its cue from a mixture of positive news and relief. This year, a recovery in exports is pulling the country out of recession, lifting shares of electronic, semiconductor, steel and auto companies. Despite high unemployment and falling wages, the Japanese have continued to shop, stabilizing the largest part of the economy, consumer spending. Investors were also encouraged in February when the government took steps to head off a banking crisis.

  

  Japanese businessmen are reflected on the display of stock prices as they cross an intersection in Tokyo. Share prices in Asia soared in early Friday trading, helping to allay worries in the region about a shaky economic recovery.

  PHOTO: AP

  Absent, too, are the accounting scandals and mammoth bankruptcies that have engulfed US and European markets, helping turn the Nikkei, in some small way, into a haven. Indeed, Japan's decade-long bear market has washed away much of its own bubble-era excesses and Internet-driven mania.

  While that has pushed the Nikkei index 75 percent below its 1990 peak, it also means prices for some of the world's biggest manufacturers are at their lowest levels in years. "Don't overestimate the weakness in Japan," said Philip Lung, senior fund manager at UAM Investment Trust Management in Tokyo. "People are looking for the downside" but should consider the positives, too.

  With US$300 million under management, Lung's funds, sold through two Japanese banks, have returned more than 4 percent each this year. Japanese small-cap funds, too, have performed relatively well. According to a ranking of global offshore investments compiled by Business Week and Standard & Poor's, Japanese funds held 21 of the top 25 spots in the second quarter, with investments managed by Jardine Fleming, Fidelity and Mercury all returning more than 10 percent.

  Fund managers in Tokyo, though, all temper their optimism. Domestic banks are still a mess, burdened with bad loans and struggling to eke out profits. With interest rates near zero and the deficit growing, the government and central bank have exhausted most of their fiscal and monetary arsenal.

  The upheaval in US markets has also led foreign investors, who were big buyers of Japanese stocks earlier this year, to sell Japanese shares to lock in profits and offset losses back home. That has taken some of the shine off the Nikkei in the last six weeks. Fortunately, Japanese retail investors have picked up some of the slack, keeping a floor under the stock market, at least for now.

  As worrisome, figures out last week showed the US economy growing at a slower rate than previously thought. Since one-third of Japan's exports are shipped to America, if the US dips back into recession, it could take Japan with it.

  "Quite frankly, the US economy is crucial to everyone," said Simon Jones, who helps manage US$14 billion for JP Morgan Fleming Asset Management in Japan. "We're not under any illusions; if the US slows, Japan will, too."

  Should America's economy and stock prices stabilize, though, pressure on foreign investors to sell their Japanese shares will diminish, said Kathy Matsui, a Goldman, Sachs strategist. In that event, the Topix index, a collection of all first-section shares on the Tokyo Stock Exchange, could hit 1,100 by year's end, about 15 percent above current levels, she said.

  Even if the outlook remains in flux, analysts say there are well-managed companies whose stocks are trading below 20 times this year's earnings, a low benchmark in Japan. For example, Toyota Motor, the world's third-largest automaker, is trading at 16 times earnings even though it recently raised its global sales target for 2002 by 3.8 percent and said it would expand production by nearly 8 percent at home.

  Two other well-run carmakers, Honda Motor and Nissan Motor, are trading at just 10 times their earnings despite record profits and updated models -- the Accord for Honda and the Z for Nissan -- that are expected to sell well.

  While technology shares have fallen out of favor with many investors, Goldman recommends looking at Canon, Japan's largest maker of office equipment, which is getting a lift from strongdemand for its digital cameras. Sharp and Fuji Photo Film are two other leaders in the production of digital cameras and LCDs. Like Japan's three largest car companies, Canon and Fuji also list American depository receipts in New York, so US investors can buy them in dollars.

  Another company with American depository receipts that consistently reports record profits is the Kao Corp, Japan's largest maker of household goods. The country's largest drug maker, Takeda Chemical Industries, and Shionogi & Co, which has a cholesterol-lowering drug called Crestor, have good long-term prospects as well.

  Not just individual stocks, but the market over all is cheap compared with 1994 and 1999, just before two other rallies. Companies listed on the Topix are trading at 22 times their forecasted earnings for this fiscal year. That is just a third the level of 1994 and half what they traded at three years ago. The lower valuation ``is not quite the same as claiming that it is cheap, but at least it is not as expensive as before,'' said Richard Jerram, an economist at ING Barings in Tokyo.
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