Despite Scandal, Ideas Bloom in Japanese Stocks
It’s pretty easy to be down on Japanese stocks, with a major brokerage scandal crushing investor sentiment there. But let’s face it: In a few months, no one will remember the scandal. By then, Japanese stocks will be back to trading on the fundamentals.
And those fundamentals are getting interesting again as the stocks plunge in value, say two veteran American money managers who specialize in Japanese stocks. They won’t argue that Japanese stocks have reached absolute bottom. But both suggest that you’d be making a big mistake to assume that the Japanese market has become a hopeless long-term case, even after 18 months of outwardly dismal performance.
The two pros are Christian Wignall, chief investment officer for the GT Global Funds, based in San Francisco, and O. Robert Theurkauf, who manages the New York-based Japan Fund, the granddaddy of all U.S.-based mutual funds that invest in Japanese stocks.
Here’s a look at how they’re playing the much maligned Japanese market now:
* WIGNALL: He notes that small Japanese investors have been enraged by the scandal, which exposed payoffs by top Japanese brokerages to favored big clients for stock losses incurred last year. The small investors’ selling has pummeled the Tokyo Stock Exchange’s Nikkei average, pulling it down to 22,608.96 as of Tuesday from more than 25,000 in early June.
But even with the June market decline, Wignall’s $65-million GT Global Japan Fund posted a 14% total return in the first six months of this year. In contrast, the Nikkei index finished the first half with a 2.3% loss.
How did Wignall beat the Nikkei? By being heavily invested in smaller stocks outside the blue chip Nikkei. That has been, and continues to be, one of the important underlying trends in Japan, Wignall says. The burgeoning economy has created a slew of new companies, and their stocks have been red-hot this year--not unlike what’s happened with small stocks in the United States.
Many of the new Japanese businesses are riding the country’s domestic consumption wave, rather than gearing for export trade. One example, Wignall says, has been a boom in convenience stores ( a la 7-Eleven) throughout Japan.
At this point, Wignall is more a seller than a buyer of small stocks, after making a tidy profit. Too many of the stocks are selling for 60 to 80 times earnings per share, he says. Instead of chasing those issues, Wignall is buying blue chips again, such as camera maker Canon Inc. He views the blue chips as substantial bargains now; many sell for just 15 to 20 times estimated 1991 earnings, he says, which is no more expensive than American or European blue chips.
To investors who are too afraid to own Japanese stocks, Wignall has a simple reminder: “The underlying growth rate of the Japanese economy is two times that of the U.S. economy.” In the long run, stocks follow a country’s economy.
* THEURKAUF: Like Wignall, Theurkauf kept his $350-million fund heavily weighted toward smaller Japanese stocks in the first half. That produced a 9% total return for the fund.
Theurkauf doesn’t minimize the significance of the unfolding brokerage scandal. “It’s a great embarrassment to Japan.” But look forward instead of backward, he advised. Long term, the Japanese government will be forced to try to eradicate market favoritism to restore investors’ trust, Theurkauf argues. “It has to be constructive, what comes out of all this.”
Indeed, Theurkauf sees the Japanese market becoming much more like other world markets in virtually every way. The bad news is that the ever-rising (and arguably rigged) Japanese market that investors knew in the late-1980s is gone forever. Theurkauf doesn’t see the Nikkei returning to its all-time high of 38,915.87, reached late in 1989, any time soon.
For one, Japan’s ridiculously low interest rates of the 1980s are history, Theurkauf says. Japanese rates are tracking world rates now, and that ends the advantage of extremely low capital costs that Japanese companies long enjoyed.
The good news, however, is that a money manager (or individual investor) armed with good research can find plenty of profitable niches and trends to play in the Japanese market, thanks to the increasing dynamism of the nation’s economy. “There are a lot of interesting things opening up for us,” Theurkauf marvels.
The bottom line for investors: Maybe the Japanese stock market will only be good for 10% growth each year in the 1990s, or some other relatively low number (compared to 1980s’ returns). But this is still one of the world economy’s driving forces, and that probably won’t change soon. “If you don’t invest in Japan,” says Theurkauf, “you better have some good reason why you’re not there.”
Trouble in Tokyo 225-issue Nikkel stock average for the past month Tuesday’s close: 22,608.96
