Betting on Japan’s Stocks: Some Pros See Bear Waning
Has Tokyo’s bear market growled its last?
Since the Japanese government announced a plan on Aug. 18 to bolster the nation’s beleaguered stock and real estate markets, the Tokyo Stock Exchange’s Nikkei index has rocketed 22.7%, from 14,309.40 to 17,555 by Thursday.
In U.S. terms, an equivalent move in the Dow Jones industrial average would be 738 points from Thursday’s close of 3,254.64. Heavy stuff.
By midday today, the Nikkei rose another 74.06 points to 17,629.06, awaiting the government’s formal unveiling of the most ambitious parts of its plan: massive new public works spending to boost the economy, and the creation of a quasi-governmental firm to rescue Japanese banks from billions in bad real estate loans.
Given that Tokyo’s bear market has gone on for 31 months--and wiped out 63% of the Nikkei’s value from its December, 1989, peak of 38,915.87--some U.S. investment pros say enough is enough. The market may turn down again this fall, but if your perspective stretches into 1993, they argue that now’s the time to get on board.
The $420-million Japan Fund, the biggest U.S.-based mutual fund investing exclusively in Japanese stocks, had 20% of its assets in cash investments in early July, waiting for a buy signal from the market. All but 6% of that cash has since been put to work in stocks, says fund manager Elizabeth Allan in New York.
“When we saw it go below 15,000 (on the Nikkei), we decided that it was low enough,” Allan said. While many U.S. analysts are deriding Japan’s fix-it plan for the market and the banks as a mere Band-Aid, Allan retorts that “it’s a very big Band-Aid.” What’s important, she says, is that the plan has begun to restore investors’ confidence. “We now know the patient isn’t going to bleed to death,” she said.
Even if the government finally begins to deal with the huge real estate loan losses sitting on Japanese banks’ books, however, some money managers warn that that won’t correct the underlying problem for most export-dependent Japanese companies: Falling profits caused by the global economic slump--and little hope for a turnaround in 1993.
Indeed, Toyota on Wednesday reported a 63% drop in operating earnings in the year ended in June. Electronics giants such as Matsushita and Sony also have reported shrinking profits.
“What’s the excitement here?” asked Jeff Russell, a manager of the Smith Barney World stock mutual fund in New York. “A money manager looking for earnings growth momentum is not going to go running to Japan,” he said.
Not only is profit growth expected to be minimal in 1993, but even with the stunning decline in Japanese stocks since 1989, most still trade for 30 to 40 times this year’s expected earnings per share, Russell notes. U.S. and European stocks typically trade for half those valuations.
The big reason why the Tokyo market has rebounded so quickly, analysts say, has little to do with fundamentals. Rather, many traders who had shorted the market--betting on a deeper decline--have rushed to cover their positions as stocks have turned. That kind of panic buying feeds on itself, but ultimately it isn’t sustainable, said Christian Wignall, who oversees the G.T. Global Japan Fund in San Francisco.
His fund’s assets are more than 50% in cash and bonds now, so he obviously doesn’t believe Japanese stocks are much of a bargain. “The market may hold up for a month or so, but the banks still have major problems, and the outlook for corporate profits is dismal,” he said.
Still, no one rings a bell at market bottoms. If you think there’s now more risk in being out of Japanese stocks than in them, you can take a stab at the market in a number of ways:
* Mutual funds. If you’re super-bullish, the Japan Fund (phone: 800-225-2470) or the Vanguard International Pacific Index fund (800-662-7447) offer two no-load (no sales charge) ways to make a maximum bet on Japan. The Vanguard fund is 83% invested in Japan.
* Individual stocks. As the accompanying chart shows, shares of many of the biggest Japanese companies trade in dollars on American markets, basically tracking their sister shares’ moves in Tokyo. The U.S. shares are thinly traded, but they’re an easy tool for small speculators.
* Put and call options. The American Stock Exchange trades option contracts on a Japan Index that tracks the Nikkei, letting U.S. investors make big bets on the Japanese market with little money down. And Paine Webber is soon expected to unveil new AmEx-listed Japanese index warrants that will trade like stocks, while allowing you to make put- or call-like bets on the market through February, 1995. Older such warrants expiring in 1993 have become less used because their expiration values are too far from market levels.
Japan on the Rise
How shares of some Japanese companies traded in the United States have risen since Aug. 18, when the Tokyo stock market hit a 6 1/2-year low.
52-week Thurs. Chng. vs. Stock/exchange high/low close Aug. 18 NEC (O) 52-28 5/8 34 3/8 +19.6% Sony (N) 41 1/8-28 1/4 33 3/4 +17.4% Pioneer (N) 30 5/8-21 1/4 25 1/4 +14.8% Ito Yokado (O) 149 1/4-110 3/4 127 +12.9% Kyocera (N) 88-51 58 7/8 +12.9% Hitachi (N) 80-56 64 7/8 +12.1% Matsushita (N) 121 1/4-88 1/4 98 +10.4% TDK (N) 43 1/2-24 7/8 28 1/4 +9.7% Canon (O) 60 1/8-47 1/4 53 +8.7% Honda (N) 25 1/2-17 3/4 20 3/4 +8.5% Nikkei index 17,555.00 +22.7%
O: over the counter; N: NYSE
