Analyst
who bucked the crowd to predict Nikkei’s recovery offers market insights
One year
ago, we gave a chunk of space to Montrealer Sid Klein to make his case
that the Japanese market had bottomed at a time when few others shared his
optimism. Mr. Klein, who
predicted the cataclysmic meltdown of the early 1990s in Japan, had a fine year.
The
Nikkei 225, languishing at about 13,000 when we published the piece, has soared
to 17,438. Has the window of
opportunity closed? Nope. Although Mr. Klein believes there’s a chance the
market may weaken in the final quarter, longer term he sees a wonderful bull
market unfolding in Japan. We asked
Mr. Klein to update us on what’s happened over the past year, where he
sees things going and to offer some investment ideas.
Special
to The Globe and Mail, Montreal
Japan’s
benchmark index, the Nikkei 225, bottomed a year ago and has rallied 45 per cent
since. During that time, the
country’s over-the-counter market, a better barometer of the domestic economy,
has risen 350 per cent.
For
foreign investors, these startling gains have been compounded by the soaring
yen. From last year’s darkness,
Japan’s year-long rebound has ushered in a change in the global equity
landscape. That change will
preserve Western bull markets in the faint and happy memories of those who
charted their own course to the blue chip of the East, Japan.
Where’s
what’s changing in Japan and what it means to investors.
Land
and taxation:
The Japanese deflated land prices in the 1990s by increasing key tax
rates. The government has changed
tack and a variety of taxes are now set to drop in the wake of lower corporate
rates. This will buoy asset prices
and consumer spending. The
securitization of real estate will liberate enormous capital into the markets.
Housing
and demography:
Expanded and extended tax breaks sent housing stocks soaring, and the
government has confirmed it wants to double the housing space over the next five
years. Increased housing stock,
apart from helping the economy, is designed to encourage Japanese families to
have more children. Housing and related industries are at the core of Japan’s
re-emergence as the world’s leading economy.
Bank
reform, liquidity, merger and acquisition activity:
The view in these pages a year ago was that stock prices would rise as
investors discovered that they were discounting lower asset prices – prices
that were themselves bottoming. In
fact, this phenomenon has led to gains in the value of stocks that Japanese
companies carry on their balance sheets, bolstering earnings and improving the
condition of pension under funding.
Further
increasing asset prices have been merger and acquisition activity, which has
roughly tripled and has far to go before coming in line with U.S. norms.
Stock prices can look forward to about $400-billion (U.S) being shifted
to mutual funds in April 2000, and July 2001, from the postal insurance fund.
Over the
past year the government, through loan programs and eventual bank capital
injections, has helped to reduce the number of insolvencies and the size of bad
debts left behind by companies.
Psychology
and the yen: With
the full deregulation of brokerage commissions, financial stocks have become
extremely vibrant, in many cases offering double or even triple-digit returns
over the past 12 months. Meanwhile,
the rise in stock prices has increased household wealth.
The shares that rallied most – domestic demand stocks – are those
held by the Japanese public. This
will ultimately increase consumer confidence.
As
discussed a year ago, this is the opposite situation to New York, where falling
stock prices hurt the consumer. Remember,
too, that the Japanese hold 40 per cent of the world’s savings.
The yen
has risen over the past years as foreigners return to the Japanese market.
While the yen may weaken in the fourth quarter as foreigners ease back on
stock purchases, the bigger story is the yen’s unfolding role as the Asian
bloc’s currency. Meanwhile, the
yen’s strength has made other Asian goods more competitive in Japan, which has
shown that it is increasingly sensitive to the need for a healthy Asian economy.
The bottom line: Debt-free companies in key industrie