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All Asia Intel Q&A’s
JAPAN’S SECOND RISING: Can Japan Continue to Prosper in the Wake of the Global Credit Crunch?
Rising from the ashes of the World War II, Japan overcame a shattered economy bereft of natural resources to emerge as the economic super-power of Asia. Indeed, driven by its manufacturing prowess and relentless focus on quality, Japan Inc. pioneered the export-led growth model that has since been emulated by many of the emerging economies of Asia.
BEEN THERE DONE THAT
BEEN THERE DONE THAT: How Japan's Banks Survived Crisis
A housing bubble bursts. Weak lenders founder and go belly up. Shotgun marriages produce a class of mega-banks deemed too big to fail. And the economy takes a hit amid a severe credit crunch. If that gives you a sense of déjà vu, it could be because the financial crisis currently engulfing the U.S. bears an eerie resemblance to Japan’s experience a decade ago. And the lessons Japan learned—many of them the hard way—could provide an important road map for American policymakers. “Japan’s experience has helped the U.S. realize that if the government does not act as fast as possible things could get much worse,” says Tatsuo Yamamuro, a fund manager at SPARX Asset Management Ltd. in Tokyo.
PEERING THROUGH THE STORM
October unleashed an unprecedented financial storm, which quickly spread from the U.S. equity and credit markets to financial markets around the world. Even financial institutions and other companies without direct exposure to U.S. sub-prime loans have been caught in the maelstrom of credit turmoil and asset de-leveraging. Driven by intense selling pressure from margin calls and investor redemptions, the MSCI Asia Ex-Japan index has fallen an astounding 33.6% so far in October alone, and stock markets in most Asian countries have shown similar declines. Based on our analysis of valuations throughout the region, we believe Asian markets have already priced in an unprecedented global economic slowdown in terms of the likely impact on corporate earnings. Despite the turmoil in the world’s financial markets, however, we remain bullish on the mid-to-long term fundamentals of Asia, both on a regional and corporate level.
POLITICAL ECONOMY 101
POLITICAL ECONOMY 101: A Primer for Japan's Policymakers
The state of Japan’s economy and economic policymaking can be summed up with the catchphrase nejire-kokkai (or “twisted parliament”), which is what Japanese media are calling the country’s political stalemate. The resignation of unpopular Prime Minister Yasuo Fukuda and selection of his successor in a ruling party vote slated for Sept. 22 won’t end calls by opposition parties for general elections as soon as October. But it could signal the beginning of the end of a policymaking paralysis. Much depends on the depth of Japan’s downturn and the extent investors have discounted the corporate earnings impact. Yet some market experts say astute government steps could help speed a recovery. Is there hope for a shallower cycle in Japan than in the U.S. and Europe? How likely is a rebound in Japanese equity and real estate? And what are the key issues for the incoming administration? Shu Abe, Chief Investment Officer and President of Tokyo-based SPARX Asset Management Co., has some answers in the following excerpts…
BIONIC JAPAN
BIONIC JAPAN: Medical Industry Growth in an Aging Society
Japanese enjoy the longest lifespan of people anywhere, with the average for men extending to 79 years and 85 years for women. While Japan’s nationalized health care may or may not prolong lives—the system has its shares of critics--one thing few question is Japanese expertise in many cutting edge medical technologies and pharmaceuticals. Traditionally, medical products and services have been developed for the domestic market, but both small and large Japanese companies are looking abroad for growth—not only to the U.S. and Europe but also emerging economies such as China. For smaller companies, finding success abroad is often a matter of, well, life and death. That presents some interesting opportunities for investing in Japan, especially when it comes to small caps overlooked by many investors, says Tad Fujimura, Head of Investment and Research at SPARX Asset Management Co. in Tokyo.
KOSPI ADDS SPICE
KOSPI ADDS SPICE: Why Korean Shares May Revisit Highs
In the swank dance clubs and coffee shops of hip districts in Seoul such as Chungdamdong and Hongdae, trendy 20-somethings in designer jeans gab with friends on $850 music players-cum-mobile phones, the latest must-have gadget for Korea’s A-listers and wannabes. While not all Koreans are as flush and idle, it's a sign of the times amid a solid economic recovery. Despite global uncertainty and a swoon in local stocks since last fall, exports are up, consumer spending on discretionary items is firm and the unemployment rate remains paltry—just 3.0% in May. So if now seems like a good time to invest in Korea’s stock market, you’re not alone. Foreign and domestic investors alike have gingerly begun to bid up the benchmark Kospi index from its early March lows. Some money managers in Seoul expect the equity market to match or exceed last year’s highs before 2008 is over. Min Soo Kim, a portfolio manager at PMA Investment Advisors Ltd., part of SPARX Group, discusses his outlook for the Korean economy and market.
JAPAN'S NEW WAVE
JAPAN'S NEW WAVE: How 'Stealth' Brands Thrive in Asia
Investing in Japan has long meant investing in the country's tried-and true automakers and home electronics exporters. But these brand name manufacturers are just a fraction of the more than 4,000 publicly listed Japanese companies. While Japan Inc.’s mainstay exporters are one way to play the market, some stock pickers in Tokyo are busy identifying the next generation of global companies. Lesser known Japanese firms now are expanding their overseas sales rapidly, but off of a much lower base. At the same time, they benefit from a perception for superior quality and cutting edge technology that have historically been associated with Japan’s auto and electronics exporters. Yet chances are you’ve never heard of these up-and-comers since many target emerging economies in Asia. “Until recently, most outperformers in the market were sort of old economy cyclicals,” says Masa Takeda, a Tokyo-based fund manager at SPARX Asset Management Co., a unit of SPARX Group Co., Ltd. “But we believe a lot of the good news for them is already in their stock prices. That’s why we’re focusing on what we see as the next wave of global blue chips.”
DECOUPLING DOGMA
DECOUPLING DOGMA: Clarifying the Asian Correlation Conundrum
Tom Naughton, Chief Investment Officer in charge of equity strategy at PMA Investment Advisors Ltd., a Hong Kong-based asset management firm and part of SPARX Group, discusses the often misconstrued notion of decoupling between the U.S. and Asian markets. Says Tom: "There has been much written about U.S. and Asian market 'decoupling' over the past several years. Yet we feel this is a very misunderstood subject. The basic concept is fairly straightforward: the idea is that these two regional markets’ performance has a low level of correlation. We believe it is true that equity markets are correlated directionally. [But] we [also] believe that modest performance in the U.S. is not ipso facto linked to modest performance in Asia. In fact, the data seem to show that Asian markets may outperform the U.S. handily over a longer time horizon."
THE OTHER CHINA
THE OTHER CHINA: How Diplomacy May Boost Taiwan's Equity
The word “China” conjures up images of sprawling shoe factories in Guangzhou and the cacophony of construction in central Shanghai. It may also invoke headlines about the 2008 Summer Olympics in Beijing or ongoing protests in Tibet. But there’s another, quieter China 120 kilometers off the coast of the mainland that's arguably just as intriguing for investors. This alternate to the mainland boasts real gross domestic product growth near 7%, one of the highest GDP per capita ratios in Asia (after Japan, Singapore and Hong Kong) and world’s fourth-largest stockpile of foreign currency reserves. It also has an 80% global market share in notebook computers and makes over 40% of the world's flat-panel television displays. So who is this mystery economic powerhouse? Taiwan. Long overlooked by investors dazzled by mainland China, Taiwanese equity has become something of a wall flower among Asian markets. But some analysts say that Taiwan’s valuations indicate now may be the time for a second look. Indeed, its market is one of the few in Asia with positive returns so far this year. “After years of underperformance relative to other Asian markets, Taiwan looks well positioned to outperform both regionally and globally over the coming 2-3 years,” says Tytus Michalski, a Hong Kong-based analyst at , PMA Investment Advisors Ltd., part of the SPARX Group.
JAPAN'S SMALL BALL
JAPAN'S SMALL BALL: What Makes Investors Smaller Cap Fans
Springtime means baseball—the national pastime not only in the U.S. but also in Japan, where the season officially got underway on March 20. Japanese aces who have joined U.S. teams such as the New York Yankee’s Hideki Matsui and Seattle Mariner’s Ichiro Suzuki have gained fame as power hitters. Yet pro baseball in Japan tends to be a game of finesse where “small ball”—bunts, singles and doubles—dominates the play. Similarly, stock pickers in Japan say that while the country’s brand name auto and electronics exporters are well known overseas, it’s the unheralded Japanese smaller cap companies that can offer investors overlooked opportunities. Indeed, even as a strong yen is bruising many of Japan’s larger caps, Japanese small caps seem poised to improve their batting average thanks to some savvy squeeze plays, says Tad Fujimura, Head of Investment and Research at SPARX Asset Management Co. Ltd.
GREENER PASTURES
GREENER PASTURES: What U.S. Banks Can Learn From Asia
Slumping stock prices. Debt markets paralyzed by a credit crunch. An overextended banking system teetering on the brink of collapse. And plummeting property values. That may sound a bit like the sub-prime mess which has snared major commercial and investment banks in the U.S. But it actually describes the situation in Asia 10 years ago when markets from Bangkok to Tokyo cratered amid a crisis of confidence. The Asia of today looks much different from the cash poor and overleveraged region on the late 1990s. Asian corporates and financials seem to have learned their lessons and, as a result, are in much better shape than many of their counterparts in Europe and the U.S., says Tom Naughton, Chief Investment Officer of PMA Investment Advisors, Ltd., part of the SPARX Group.
JAPAN'S FREAKONOMICS
JAPAN'S FREAKONOMICS: How Policy Undermined the Economy
Are Japan’s wounds self-inflicted? That’s a matter of hot debate these days in Tokyo as the economy struggles to maintain momentum and the stock market zigzags. What’s clear is that a series of clumsy policy moves in recent months have done more to hamper the rate of growth in Japan than to stoke it. The term "kansei-fukyo," which means “government-made recession,” is now on the lips of many Japanese as the chief culprit in the kidnapping of a long anticipated domestic-led recovery. Critics say tough new regulations from mid-2007 on credit, housing and investment products, along with loose talk of tax hikes, quickly chilled Japanese consumer demand. That, in turn, has raised fears Japan might follow the U.S. into recession and see stock prices slump. But Tatsuo Yamamuro, a fund manager at SPARX Asset Management Ltd. in Tokyo, says those policy missteps' impact—bad as it was--has begun to fade and that current Japanese equity prices may present a buying opportunity.
STEALTH INFLATION
STEALTH INFLATION: What Higher Prices May Mean for Japan
A frog jumps into an old pond; the sound of water. That famous haiku by Japan’s most renowned medieval poet may be an apt metaphor for the Japanese economy in 2008. Much as the ripples in a frog’s wake stir up calm waters, Japan’s stagnant economy soon may be impacted by turbulence from a blip of inflationary pressure. On the surface, the Japanese economy still seems mired in the deflationary doldrums, but recent data show consumer prices have surged ahead at the fastest clip in nearly a decade. So far, that splash in the pond has done little to motivate investors in Japan's equity market. But Tatsuo Yamamuro, a fund manager at SPARX Asset Management Ltd. in Tokyo, says an inflationary jolt is exactly what’s needed to trigger a positive cycle of stickier prices, higher corporate profit margins and bigger paychecks that could ignite a long awaited recovery in Japanese consumer spending levels...
OFFICE LADIES' REVENGE
OFFICE LADIES' REVENGE: Why Japan's Glass Ceiling is Cracking
The secret to Japan’s success is often attributed to its hardworking "salaryman"-- the unheralded worker bee who routinely puts in 14-hour weekdays at the office and spends weekends on the golf course with clients. While that stereotype rings true when it comes to an obsession with overtime, a fierce sense of corporate loyalty and the ubiquitous dark suits, the term salaryman may be outdated in at least one key aspect—its gender. That's because after years of being relegated to menial roles within the conservative confines of Japan Inc., women are starting to fill more full-time positions, including managerial roles overseeing men. Credit Japan’s pressing labor crunch and a rapidly aging population for the shift, says Ayako Fukushima, an analyst at SPARX Asset Management Co., Ltd. in Tokyo.
MODERN ASIAN MYTHS
MODERN ASIAN MYTHS: How Perceptions Diverge From Reality
For first-time travelers to Asia, debunking common myths about the region is one of the most eye-opening experiences. For example, chopsticks may be standard tableware in north Asia, but they are rarely used in Southeast Asia (with the notable exception of Vietnam.) Similarly, misconceptions about Asian economies also abound. For example, while much of Asia is classified as “emerging,” today Hong Kong has a higher per capita income than Britain. What’s more, many people forget that Japan—not China—is still the world’s second largest economy. When it comes to investing in Asia, it can be even more complicated separating fact from fiction. Much has changed since an Asia-wide financial crisis 10 years ago, but investors’ caution may rest on outdated assumptions about the region. “The perception about Asian markets is often different than the reality,” says Tom Naughton, Chief Investment Officer of PMA Investment Advisors Limited, part of the SPARX Group. “Some misperceptions were once true but are no longer so and others were never true but somehow became conventional wisdom.”
SHIFT_JAPAN
SHIFT_JAPAN:Is Japan Revved for Its Third Gear?
Japanese equity markets have undergone turbulence in recent weeks
due partly to fallout from the sub-prime mortgage issue in the U.S., but also from persistently weak price data, currency market volatility and political instability. So far, Japan’s economic recovery has been led by the twin engines of capital spending and exports, but market watchers are closely parsing consumer spending data. They're looking for signs of a long awaited pick-up in domestic demand as a third gear to shift into faster growth. How likely is it that Japan will make the transition? And what are some of the signposts to look for? Shuhei Abe, Chief Investment Officer at SPARX Asset Management Co., Ltd. responds to these and other questions, such as the fate of shareholder activism in Japan and the outlook for the country’s political leadership...
SMALL SMARTS
Can Japan's Small Caps Stand Tall Again?
Japanese small cap stocks were the toast of Tokyo in 2005, when the major stock indices tracking smaller companies’ equity soared on expectations for higher profit growth. But since early last year, share prices of small cap stocks in Japan have taken a nosedive—falling faster, and farther, than Japanese large caps or even mid caps. The immediate trigger for the collapse in early 2006 came from concerns about accounting standards at smaller firms. Yet smaller companies’ share prices have continued to sink due to a number of other more fundamentals-oriented factors. But Tadahiro Fujimura, Head of Investment Research at SPARX Asset Management Co. in Tokyo, says the worst may be over for Japan’s hard hit smaller stocks...
ASIAN DYNAMO?
ASIAN DYNAMO: Why Asia Inc. May be Stronger Than Ever
Asian markets have long been known to catch a cold when U.S. markets sneeze. Coupled with local business cycles that can zig when the U.S. zags, the potential for volatility has dissuaded some investors from wading into Asia. But while the U.S. remains a key export market for Asian exporters, some equity experts say surging levels of intra-regional trade in recent years may better insulate the region from external shocks—like a downturn in demand from the U.S. More broadly, the risk environment in Asia overall appears to have evolved significantly over the past decade. Thomas Naughton, Chief Investment Officer for Equity at PMA Investment Advisors Ltd. in Hong Kong, says that could result in lower levels of correlation with other major markets--such as the U.S.--over the long-term...
SEOUL STIRRING
What's Behind a Rally in Korean Stocks?
In the dockyards of Ulsan and Geoje along the southeastern knob of the Korean peninsula, the grind and hiss of heavy-duty cranes and arc-welding torches is deafening. That industrial symphony is testimony to the soaring demand for oceangoing freighters from the world’s biggest shipbuilding nation. Korea’s shipbuilding, industrial engineering and steel sectors have all undergone something of a renaissance as orders have piled up from the four corners of the world. Strong earnings at these cash rich “old economy” companies have helped spark a rally in Korean stocks—up some 33% so far this year—that has surprised many foreign investors who have kept to the sidelines. While risks associated with a “Korea Discount” in recent years haven’t entirely dissipated, Min Soo Kim, a portfolio manager at PMA Investment Advisors Ltd., part of SPARX Group., says the Seoul market—with one of the lowest price-earnings ratios in Asia--may be poised for continued gains in the months ahead...
CHINA'S COATTAILS
What's Good for China May Be Good for Asia
China’s rise as an economic power has been swift, but its stock market's ascendancy into the major leagues has been even more rapid. While just a handful of mainland Chinese companies topped $500 million in market cap ten years ago, hundreds easily clear that hurdle today. China-based banks, for example, which teetered on the edge of insolvency in the late 1990s, now boast a combined market capitalization north of $500 billion. No wonder Chinese equity, including so-called H shares traded in Hong Kong, has leapfrogged other markets in recent years to become a leading component of Asia ex-Japan stock indexes. Investment pros say China’s not the only game in town--stock markets in Australia, Hong Kong, Indonesia and South Korea all surged to record levels in May. But they caution not all Asian markets are equally poised for gains in the months ahead…
Heavy Metal
A New Look at Japan's Old Economy
Heavy, thick, long, large. Those adjectives describe the smokestack manufacturing which begat the industrialization of the world’s leading economies. While the U.S. and most of Western Europe have moved to post-industrial information technology and service sector-fueled growth, many 100-year old heavy industries in Japan have managed to survive—thrive even—amid rapidly changing business conditions. There’s even a word in Japanese, ju-ko-cho-dai, which refers to these “heavy-thick-long-large” firms. Once written off as Old Economy dinosaurs, Japan’s cash rich steelmakers are rewarding shareholders with record levels of stock buybacks. Orders for freighters at Japanese shipbuilders are at 31-year highs. And plant equipment makers are hiking wages after years of holding the line. Even so, the competitive threat from Asian rivals poses a high hurdle for Japan’s heavies in the 21st century…
Downsizing Debt
How Japan is Kicking Its Deficit Habit
It’s no secret the biggest players in the U.S. government debt market are foreigners, who now own over half of the $4.3 trillion in Treasuries outstanding. Nor it is news that Japan is the single largest U.S. debt-holder with some $644 billion (China is No. 2 at $350 billion). But it might come as a surprise Japan itself is in hock with government debt exceeding 170% of GDP according to one measure, making it the most profligate of any industrialized nation. Worse, with rock-bottom interest rates headed up, Tokyo’s debt servicing costs could expand dramatically in “out years” ahead. Yet the prognosis for Japan may not be so dire. Government outlays are down, tax revenue is up and Japan is on track to wipe out its annual deficits entirely by 2011. All of which bodes well for an economy facing a severe future demographic crunch…
Vulture Culture
How M&A is Taking Flight in Japan
For a glimpse of Japan’s conflicted attitude toward mergers and acquisitions, look no further than Japanese public television, which began broadcasting a six-part mini-series on Feb. 17 called Hagetaka, or The Vulture. It’s based on a best-selling novel about a Japanese banker who joins a buyout fund in the U.S. and then returns to Tokyo with M&A on his mind. The series' subtitle says it all: “Is he devil or savior?” As Japan Inc. slowly comes to terms with the art of the deal, the number and variety of transactions continue to grow. In May, a ban preventing foreign companies from paying for acquisitions with stock is slated to be lifted, clearing the way for a wave of new deals...
Boomer Jrs.
Why Japan Inc. Loves Its 30-Somethings
Eight years ago, the factory town of Musashi Murayama became known as ground zero for Japan Inc.’s wrenching period of corporate restructuring in the 1990s and early 2000s. The bedroom community some 50 km west of Tokyo was once home to Nissan Motor Co.’s flagship facility, pumping out 453,000 cars a year and employing some 5,000 workers. But financial woes forced Nissan to shutter the plant as part of a 30% cut in global production capacity. Today the site has been transformed into a thriving shopping center: Diamond City Mu. The mall, which opened in November, targets Japan’s “baby boomer juniors,” a population bulge of those born in the early 1970s. These 30-somethings are a key demographic who are just starting to impact the Japanese economy in a potentially big way...
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