Some international money managers are selectively buying Japanese stocks as that market dips on such bad news as the current U.S.-Japan trade row.
They're intrigued by the market's cheaper stocks and expectations of big profit jumps ahead.
Indeed, the Institutional Brokers Estimate System, New York, estimates Japanese corporate profits should rise an average of 72% for the 12 months ended May 1996.
(So far, earnings reports for Japan's fiscal year ended March 31 are proving to be "slightly less than expected, although not dramatically so," said Michael Steinberg, managing director in the New York office of Tokyo-based Nomura Securities Co. Ltd.)
But few of the managers interviewed are buying any auto stocks, whose prices are expected to weaken if the U.S. stands firm on its huge import tax on luxury Japanese cars.
For its international fund, the Glenmede Trust Co., Philadelphia, has been selectively buying in Japan since year end, said Andrew B. Williams, vice president. The fund now has a weighting of just less than 30% in that market vs. about 24% at the beginning of 1995.
Although the firm has no exposure to Japan's auto manufacturing, Glenmede does have auto parts supplier Nippondenso Co. Ltd. as a long-term holding. And, it recently bought some pharmaceutical company stocks whose valuations were attractive, as well as shares in Acom Co. Ltd., a consumer finance company.
In Mr. Williams' view, the Tokyo market now offers selectively attractive stocks that should benefit over the longer term in Japan "and its continued growth in Southeast Asia."
Similarly, Charles Lovejoy, portfolio manager in Boston of the Legg Mason Global Equity Trust, is "finding more stocks to like in Japan," although not in autos or in finance. The fund, whose style is bottom up (and which is underweighted in Japan), recently bought the stock of Takuma Co. Ltd., an office equipment company, and some shares of Intendo as well as Chudenko Corp. in construction.
Mr. Lovejoy believes the market is "bearish but moving into neutral territory." And he doesn't believe prices fully reflect the expected growth in earnings over the next year.
Expected higher corporate profits in the year ahead naturally would improve valuations, and perhaps give Tokyo's market an edge over New York's.
As Edgar Barksdale, president of RCB International Inc., Stamford, Conn. explains: "Japan is just coming out of recession, and the growth phase in its earnings is just beginning. At the same time, the U.S. is at the tail end of its growth phase. Since both markets are now selling at a nearly similar price-to-cash-flow basis, one market (Japan's) is starting to look like a better bet than the one which is in a more advanced point in its cycle."
But the view from inside Japan tends to be grimmer. Domestic investors seem more daunted by Japan's current economic and other woes.
May's announcement by the U.S. government to slap 100% tariffs on luxury Japanese cars imported to the United States was just the latest blow; the country already was reeling from other woes ranging from the Kobe earthquake to the yen's dramatic surge.
Even before the recent tariff announcement, Ryujiro Miki, a manager in the investment planning department of Dai-ichi Mutual Life Insurance Co., Tokyo, cited a host of economic difficulties in Japan - from the yen's effect to the tight fiscal situation. (The government's big spending program announced last year isn't coming through as some observers had expected.)
All in all, he was "very pessimistic" about the Japanese stock market.
Nomura Securities "is continuing to be pretty cautious about the (Japanese) market," said Mr. Steinberg. "I would recommend that (investors) be underweighted in that market. There is still a lot of concern about corporate earnings, and perceptions that the economy may be rolling over for the third time."
In the face of a high yen, RCB and others expect consumer spending to help power Japan's economic growth. But whether spending will pick up - and if so, when - remains unclear. Japan's retail sales and household spending have been declining in recent months. (Retail sales were down 2.1% in March, after having dropped 1.4% in February and 2.7% in January.)
Moreover, according to Mr. Steinberg, "wages are not rising, unemployment is ticking up and companies are continuing to rationalize. That is the overriding concern." But, on the brighter side, "overtime hours in manufacturing have picked up somewhat, and there are some signs that domestic auto sales are recovering a bit," he noted.
Despite its caution, Nomura does recommend the high-technology area, such as companies in computers and semiconductors that should gain from the global boom in those areas, said Mr. Steinberg.
Although William Arah, a director of Marathon-London, London, expects the summer to be difficult for the market, a year from now a number of Japan's problems should have abated, he said.
Marathon's analysts see Japan's market as similar to America's in the early 1980s - having clear value but little way to realize it. In many ways, they believe, Japan is still obsessed with growth, despite the sluggishness in its economy. Marathon-London hopes Japan will open up more avenues for realizing shareholder wealth, as did the United States in the 1980s, with its explosions of mergers, takeovers, stock buybacks and the like.
Not surprisingly, some of the companies it likes are described as big cash generators, such as Kao Corp. in household products and Fuji Photo Film Co. Ltd. "In cases like Fuji, where management is facing big questions about what to do with its cash, we hope it uses it to reward shareholders," said Mr. Arah.
RCB is among those holding pat on their Japan exposure - in RCB's case, 35.3% as of March 31. However, in May the firm began hedging its yen exposure back to dollars - and now 80% of this exposure is covered with a hedge. "We're optimistic that the Japan market will appreciate. The risk now is currency," said Mr. Barksdale.
As for the U.S.-Japan trade war, Marathon's Mr. Arah calls it "nonsense," insisting many outsiders underestimate how much Japan already has opened its markets.
The real worry for investors in Japan, he believes, is more psychological. With repeated trade confrontations, managements might take their eyes off the ball. Instead of operating competitively, they might structure their operations to avoid killing the competition and "antagonizing America," he said. That would be far more dangerous than the shorter term consideration about profit margins affected by more imports.
To Mr. Arah, "the donkey is already moving fast enough without having to be beaten. Once consumption is rising again in Japan ...... it will be (naturally easier) to get import growth."
To Richard Foulkes, chief investment officer of Schroder Capital Management International, London, the more crucial issue than foreign trade in Japan is domestic consumption. "That's six times more important than exports to the health of the Japanese economy," he said.
"We anticipate a very significant domestic-led recovery spurred by domestic consumption, and we're focused on companies whose predominant business is the domestic marketplace vs. exporting."
He added: "You could describe us as a bull in certain market areas." Currently, Schroder has a 34% exposure to Japan in its non-U.S. portfolios.