Sunday, January 22, 2006

Finally The Sun Also Rises In Japan

In the early part of my career, I have the priviledge of working for the biggest broker in Japan, Nomura Securities. It was a wonderful experience as I got to sell stocks, convertibles and warrants (aahhh the Japanese warrants, what an instrument) to institutions in Australia and NZ, yet I get to travel to Tokyo extensively. It was a heady period. I was naturally a top sales guy as the Nikkei zoomed from 22,000 to 31,000 during my stay. An excessive bull run tend to make one believe that they are smart and near invincible. My bosses only chided me for not spending enough in my entertaining of clients - can you beat that, gotta love the Japanese work culture.

Thankfully I got out and went into equity research for Asia Pacific markets a year before the Nikkei started imploding. Naturally, markets would correct and they would come back after a few months or even a year or two, but the Japanese equity markets never recover that way. It was like it went into a coma and took more than 10 years to ebb to 10,000. If you stayed out for 10 years, you'd save a lot of money. I have yet to make bullish comments on the Nikkei for the past 12 years, but I think its time to get bullish now. The Nikkei's plunge this past week made the headlines around the world for the wrong reasons. People should look at how well Japanese stocks have done since 2000. Japanese stocks rose 24.83 percent between 2000 and 2005. Not fantastic figures but looks to be a solid base building for the Nikkei. Yup, it takes that long to build a base, especially when they took 10 years to deflate.

U.S. investors have been putting their money where the growth is. In 2005, they put more money into international stock funds than domestic funds for the first time in more than 20 years. During the four weeks that ended Jan.4, 2006, investors pulled US$2.07 billion out of U.S. domestic equity funds, while they invested US$802.5 million in international stock funds. For the first time in 15 years, there was a pickup in domestic demand that's not due to on government public projects. Other more interesting signs of growth include rising golf membership fees and land prices as well as increasing amount of bank loans.

My main deciding factor for rating Japanese equities well is due to Koizumi. That guy managed to stay around and around, and has managed to push through effective reforms. Crunching the archaic postal savings system and further push for foreclosures and reducing cross-holdings of shares have all started to gather steam for the real economy. Smart private equity funds have invested aggressively in many listed and private Japanese firms, and this has renewed thinking about corporate restructuring and reforms. Life time employment is so last decade. Outsourcing is no longer a political issue but rather part of Japanese business model. I believe the Japanese equity markets have a few solid years ahead. 20,000 to 22,000 for the Nikkei is attainable within the next 1-2 years.

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