[This interview originally appeared on our sister site, IndexUnivese.eu.]
Ed Merner, chief executive of the Atlantis Japan Growth fund and a 40-year veteran of the Japanese market, tells IndexUniverse.eu editor Paul Amery why he thinks now is a good time to buy.
IndexUniverse.eu: Ed, you’ve been analysing and investing in the Japanese equity market for over forty years. How do current market valuations compare with what you’ve seen in the past?
Merner: We’re back to 1970s levels, when Japan was very cheap and was widely regarded as an emerging market. The market currently looks inexpensive on several measures: price to book, price to earnings, earnings yield and real yield, for example.
There is one notable difference, though—then, overseas investors had very limited involvement in the market, whereas now foreigners own around a third of Japanese equities and represent nearly two-thirds of the daily trading volume.
For this year, things are finely poised. Japanese GDP is poised to rebound by 2-3% and corporate earnings could be up 50-60% from last year’s depressed levels, which would be a bullish backdrop for equities. Working against a V-shaped recovery in Japan are knock-on effects from the eurozone turmoil, a slowing economy in China and other Asian economies and an unstable political situation within the country.
IU.eu: What are Japan’s longer-term growth prospects? Many people have pointed out the poor demographic outlook and the ageing population.
Merner: Currently, Japan’s population is either stable or on a slight downtrend. While life expectancy is increasing, people are also working much longer—up to 65 or 70. However, immigration to Japan is also on the rise, even if the tsunami put a temporary stop to that trend. Immigrants tend to be from younger age groups, which helps the overall demographic picture.
Per capita income in Japan has also been rising quite steadily and is at levels that compare well with other mature, major economies.
IU.eu: What proportion of the savings of those Japanese workers is heading into the equity market?
Merner: Some of the savings are entering the market, but people are not yet ready to commit capital longer-term. They tend to buy in after sell-offs but are quite quick to take profits on any rebound. Foreigners, by contrast, tend to be momentum-chasers, buying in after the market has already risen.
Domestic investors in equities haven’t fared well over the last seven or eight years and so most have lost confidence. It will take a while for that confidence to be rebuilt.
IU.eu: How are the banking and property sectors faring—are we now past the worst of the bad debts?
Merner: Property prices are now stable or rising slightly, especially in Tokyo. It’s taken the banks twenty years to write off their bad debts, but now they’ve largely done so and most of them are now in excellent financial shape.
A major current theme amongst the banks is international expansion. Banks are now moving actively into other markets, especially in Asia, a region they know well. To a lesser extent, banks are moving into South America as well.
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