McEwen Investment Report 365 – Nov 16 2005
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New Zealand investors looking to take advantage of the high kiwi dollar to invest overseas can find few obvious bargains. Australia still looks good thanks to its resource-based economy but prices are already high. Europe is showing very little
growth and worries about the US continue to mount. That leaves Asia and Japan.
After a decade and a half of economic malaise, Japan is on the rebound at last.
Latest figures show Japan's economy grew for the fourth straight quarter and at a faster than expected pace, driven by increased consumption and capital spending. Gross domestic product grew 0.4% in real, price-adjusted terms from the previous quarter, well above expectations although lower than the previous quarter.
Investment banks Goldman Sachs and Merrill Lynch are very positive about Japan's market over the next few years. "The outlook for the Japanese economy continues to improve. Consensus growth forecasts have increased, reflecting greater confidence in the strength of the Japanese consumer and the prospect of further economic reform," says the former. "We expect investors showing renewed interest in Japan to purchase shares during anticipated market dips. We do not foresee steep downside in the near term ...," says the latter.
Some of this positive outlook stems from an overwhelming political victory by reformist prime minister Junichiro Koizumi, who wants to privatise many moribund government departments such as the post office, which controls trillions of dollars in savings. Meanwhile the long-suffering banking sector is on the mend, thanks to strengthened balance sheets and the increasing involvement of more efficient offshore banking groups. GDP growth is likely to be around 1.9% in 2005 and 2% for 2006, which is hardly rapid growth compared with many other Asian nations but a major improvement on the 1990s, when growth was at times actually negative.
News agency AFP reports that The Bank of Japan and the Japanese government have both recently declared that the economy has moved out of a soft patch and there are signs that a return to inflation after almost eight years of damaging falls in consumer prices. Japan's economy endured a decade-long slump after its "bubble economy" burst in the early 1990s despite a subsequent series of spending packages by the government and near-zero interest rates. Although there have been plenty of false starts before, most economists are optimistic that this time the recovery will stay the course.
The Bank of Japan says an end to deflation is near and the central bank is expected to halt its ultra-expansionary monetary policy of flooding the financial system with cash sometime next year. Atsushi Takeda, chief economist at the Mizuho Research Institute believes deflation will end in early 2006 and sees few clouds on the horizon for the Japanese economy.
One of the difficulties about picking shares in Japan is that accounting practices are so opaque that coming up with a meaningful valuation is difficult. A better option may be to invest in an index, which helps solve that problem.
A new product by New Zealand-based company Liontamer offers an 'accelerated' investment that gives 1.3 times the appreciation of the Japanese market, plus a capital guarantee. It's Japan Series 1 product closes on December 16 and a prospectus can be obtained from www.liontamer.com
McEwen Investment Report is published by Investment Research Group Ltd, PO Box 46-290, Herne Bay, Auckland. Tel (09) 361 3818. Fax (09) 361 3808.
Web: www.irg.co.nz
Disclaimer: every effort is made to check the accuracy of information in this document and the opinions expressed are genuinely held. However no responsibility can be taken for any error or omission and, given the volatile nature of investment markets, no guarantee can be given that predictions or forecasts contained herein will be met. David McEwen may consult to, or own shares in, companies that are recommended in this document.
