No Turnaround In Sight For Japanese Equities

This story features PLATINUM ASSET MANAGEMENT LIMITED. For more info SHARE ANALYSIS: PTM

The company is included in ALL-ORDS

By Chris Shaw

Even allowing for the volatility in global equity markets in recent months Japanese equities have massively underperformed the World MSCI over the past two years, the Topix Index losing 4.6% since the start of last year.

Add in mixed economic signals that suggest the Japanese economy is as close to sliding back into recession as it is to continuing with the currently modest pace of its recovery and there are legitimate reasons to question whether or not it is worth being in the Japanese market at all.

According to GaveKal Research the one thing the Japanese market has in its favour is it is currently undervalued, which makes it an exception in global markets. The problem in the group’s view is the fact the market is cheap is unlikely to be enough in itself to spark a recovery in Japanese equities, especially as foreign holdings in the Japanese market are already at or close to record levels and it has been foreign buying leading Japanese market rallies in recent years.

So what could push up Japanese equities? It is unlikely to be political reform, GaveKal noting the paralysis in political terms since the Democratic Party of Japan strengthened its position in the Upper House in the recent election remains, which will effectively stop any significant reforms.

It is also unlikely to be stronger economic growth as GaveKal points out leading indicators dropped to zero in September, which is a 10-year low. With other economic data such as wages and housing starts continuing to trend lower it appears there won’t be any improvement in the economic outlook to tempt investors back into the market.

This leaves valuation-based buying, GaveKal suggesting this at least offers a chance for an upturn in the market as dividend yields are getting closer to the yields available from Japanese Government Bonds and the end of financial year (March) is getting closer and this could see some window-dressing related buying.

As a result the group sees potential for a jump in the Japanese market in coming months from currently oversold levels but doesn’t rate it strong enough for aggressive positions. Rather it suggests investors wanting exposure to the potential bounce look at out-of-the-money call options in the index, as this strategy would limit the downside if there is no bounce.

Such an outlook has implications for local fund manager Platinum Asset Management ((PTM)), as the group has for some time had a large exposure to the Japanese market. This has dragged down performance in recent periods and resulted in a weakening share price, a trend Merrill Lynch expects will continue.

The broker recently downgraded the stock to Sell from Neutral, suggesting the flat earnings outlook as indicated by management will impact on fund inflows and so drag down profits. The veiled earnings warning has dragged down broker forecasts, as analysts had previously been factoring in an increase in earnings for FY08 of around 8%.

Even ABN Amro is more cautious in its tone, as while the broker continues to rate the stock as a Buy this is only a reflection of the group’s good track record over many years. The broker has also trimmed its earnings estimates, while Credit Suisse recently pointed out earnings risk remains to the downside given the potential for a continuation of the trend of net fund outflows.

Overall the FNArena database shows Platinum Asset Management is rated as Buy once, Hold twice and Sell once, with an average price target of $6.28, down from $6.54 early in November and prices above $9.00 when the stock first listed in May.

Shares in the company today are up slightly and as at 3.10pm were 4c higher at $5.01.

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