The long-beleaguered Japanese stock market is at or close to its bottom, a number of institutional money managers say.
The Nikkei 225 index plunged 10% in the week ended Jan. 10 to 17,303.65, its lowest level in more than a year, before rallying 5% on Jan. 13. For the year ended Jan. 7, the Nikkei 225 was down 9.4%. Japan's performance has a big impact on overall international portfolios; it comprised 32% of the Morgan Stanley Capital International Europe Australasia Far East index at the end of 1996.
"The most recent developments have pushed us into a more bullish position in Japan. It's the single most attractive equity market for us around the world," said Max Darnell, director of First Quadrant Corp., Boston, which runs $6 billion in international assets for clients worldwide.
He said the market is down 45% from its 1989 peak.
Peter Raphjens, director of global investments for PanAgora Asset Management, Boston, which runs $15 billion in global assets, said while it's "not unheard of for equity markets to go into death spirals," he doesn't see that in Japan.
"The country is disseminating bad news like peeling the layers off an onion instead of getting out the bad news at once. So the bad news became self-fulfilling in the first few weeks in January."
"That's the kind of thing you can explicitly exploit. You can find a lot of values like that," said Mr. Raphjens.
Even bullish investment managers acknowledge the government's plan to raise the consumption tax at the end of March could curb consumer spending and harm the economy. And its plan to slow public works spending to reduce the budget deficit has hurt construction stocks.
Plus, the government's moves to liberalize the financial services industry - which they view as positive for the long term - have battered financial stocks.
While some analysts have made dire projections on the Japanese economy, others are more sanguine. Goldman, Sachs & Co., New York, is forecasting 2.4% nominal GDP growth for 1997.
1.5% GDP growth?
For instance, executives at both Brown Brothers Harriman & Co., New York, and PanAgora expect Japanese GDP growth in the 1.5% range.
"We continue to be underweighted, but at current valuations we may move to neutral soon. If the economy continues to recover and sustained good news shocks people out of their negative predisposition, on a straight valuation basis you could see this becoming a buying opportunity," Mr. Raphjens said.
Christopher Luck, director of First Quadrant, said: "We've liked Japan for a couple of years now. As it's gotten creamed and we've not looked good, we've liked it even more. If nothing else, we're stubborn and believe in our convictions. We've been pretty consistent on the stocks we've owned."
Paul Fraker, portfolio manager for Brown Brothers, which runs $700 million in international assets, said: "The very economically sensitive stocks have sold off well beyond the fundamentals and represent good value," particularly stocks involved in plant engineering. That sector would include JGC Co., Chiyoda Corp., Toyo Engineering Corp. and Mitsubishi Heavy Industries.
The firm has had a market weighting in Japan for some time.
"If the market were to decline substantially from here I think we probably would tend to increase it," said Mr. Fraker.
Brown Brothers owns some, but not all, of shipping companies such as: Mitsui O.S.K. Lines and Kawasaki Lines, and exporters such as Toyota Motor Corp., Honda Motor Co. Ltd., Sony Corp. and Sharp Corp.
Exporters would benefit from a further decline in the yen because of their heavy dollar revenues, he said.
Bank stocks appealing
Brown Brothers is even starting to look at banks. "Some have sold off so dramatically they might deserve a second look," Mr. Fraker said.
First Quadrant is already emphasizing financials, such as Mitsubishi Trust & Banking Corp., its largest holding, and Sumitomo Bank Ltd. It also owns stocks in basic industries - such as shipbuilding and construction firms like Misawa Homes Co. Ltd. - "the ones that are really getting hammered," Mr. Luck said.
Mr. Darnell said: "We're moderately bearish on the U.S. but strongly bullish on Japan, since the beginning of the year.
"The market is very definitely at or close to a bottom. We don't know when it will rebound but we know when it's mispriced."
PanAgora's Mr. Raphjens said: "There are big negative forecasts on Japan but for the first time, they're largely driven by technical measures" - a herd mentality is driving the selling.
"That will eventually change. The November industrial production numbers were poor. If we see a good number for December and no more bad news on individual financials, you could see this ship righting itself." The December production figure is due to be released Jan. 21.
But Mr. Raphjens is not climbing aboard just yet.
"We'd rather be a day late than a month early. We want to make sure the herd has stopped heading south before we'd start to overweight," Mr. Raphjens said.
Federated Investors, Pittsburgh, has cut back its Japan exposure to 20% from 30% since September and plans to stay put as long as the currency is stable.
"The only way Japan can bail out of these problems is if the yen stays weak. The U.S. wants a strong dollar, so we're on the same page here," said Mark Kopinski, vice president of Federated's new international unit, which runs about $210 million in assets.
For stocks, "there's only about 10% more downside. Japanese stocks are close to a bottom."
"Prices were too low to resist on a book value basis," before they recovered a bit on Jan. 13, Mr. Kopinski said?.
Mr. Kopinski said there's still more downside in construction and financials stocks. For instance, the market capitalization of Nomura Securities Co. Ltd. is twice that of Merrill Lynch & Co. But most of the international powerhouses like Sony, NEC Corp., Toyota and Honda "are not overvalued."
2 who are underweighted
Even bears on Japan have their price.
"Financial stocks are still very expensive stocks," said Gordon Anderson, managing director and investment director of CastleInternational Asset Management Ltd., Chicago. "They're not bargain buys to us. If there was a significant fall in mainline industrial stocks we might put more money there. Another 10% drop would be tempting."
CastleInternational, which runs $1.7 billion for U.S. clients, slashed Japan exposure to 20% from 31% in recent weeks.
"It's a very strange market," Mr. Anderson said. "There was a tremendous fall overall (in early January) yet industrial stocks have continued to rise in local yen terms. .*.*. We reduced those export stocks across the board. We would remain very cautious.
CastleInternational owns such stocks as Honda, Hitachi Ltd. and Tokyo Electron Ltd.
William Dodge, senior managing director and portfolio manager of Marvin & Palmer Associates, Wilmington, Del., which runs $3.5 billion in international and global assets, said the "general lack of political action on deregulating the domestic market and providing follow-on fiscal stimulus makes the Japanese market unattractive for the balance of 1997" unless he sees substantial political action.
"You need a crisis to get any action at all."
As a result of the market drop, Mr. Dodge wouldn't be surprised to see a deferral of the government's planned tax increases and a rise in government spending. Marvin & Palmer is at about half the MSCI EAFE index's weighting in Japan.
Some 'resolutely bearish'
Despite the market's big drop, some managers are resolutely bearish.
Smith Barney Capital Management, New York, has "one of the lowest allocations of any fund complex - 6% to 7%," said Jeff Russell, portfolio manager for the firm, which has $3 billion in international equities.
"The budget deficit is up so the government has moved to increase taxation to reduce consumption plus there's no room to lower rates," which are at a rock-bottom 50 basis points a year.
With stocks trading at 50 to 60 times earnings, "we're not particularly inclined to catch the falling knife of a market that's gone down 20% in the last few weeks."
