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Newletter Pascal Jeannenot n8th  



Long Term investment (9)


Shift from savings to investments at long-term crossroads in Japan.

Pain tolerance: are you still there?

At some point I knew this would happen but I can’t help mentioning it: The idea to repackage US toxic assets into publicly distributed Investment Trust and sell it to Japanese individuals is finally going into practice.
Blackrock AM already expressed interest in sub-advising US government sponsored toxic assets public scheme and has already embarked into capital raising plan. Targets are worldwide institutional investors for US$5 to 7 billion out of which US$1 billion from Japanese institutional investors. However this is not the point, the juicy bit is obviously chasing Japanese retail investors trough a purpose-made publicly distributed Investment Trust. 
Brilliant concept? Sorry not so... The idea was suggested in Japanese weekly Diamond as early as 9th January 2009. Perhaps ‘Wakuwaku’ Economic research institute should sue Blackrock’s Fink for copyright infringement! If you think about it a publicly distributed investment trust mainly invested into US toxic assets looks like the ultimate product for yield hungry retail investors.
In fact this idea was put into practice during the 90’s when Japanese banks loan books were sold in bulk to foreign investors at heavy discount to face value. Those foreign investors did make lot of money out of it! Now is pay back time so why not buying repackaged US bad loans? Maybe there are extraordinary profits to cash in on a 5 to 10 years time lag. Fact is there are countless types of equity investment trusts sold to Japanese savers but not yet a single ‘toxic assets investment trust’. Perhaps such a task would have been daunting during late 90’s but nowadays individual investors are much more educated and would probably welcome such new product.

This allows me to jump-start my favorite topic:  Japanese investment industry.

So where do we stand exactly? For fiscal year 2008 (which ended in March 2009) Japanese asset management industry had close to Yen 310 trillion in assets under management a 20% decline compared to fiscal year 2007. Recovery should be limited in scale for 2009 as many professionals bleed red ink slashing costs and downsizing staff wherever possible. In fact the whole buy side industry is in full restructuring mode as Japanese mega banks are taking over foreign asset management businesses.
 Japanese publicly distributed investment trusts universe which grew at relentless pace for five years until late 2007 is at standstill, it should take up to 2 or 3 years for the industry to return to March 2008 peak level. Asset managed by the whole industry declined by Yen 64 trillion, the largest fall since 1999. Japanese households money shift from savings to investment is currently in reverse mode and back to savings. Long-term the cycle is unchanged but for money flows to recover unrealized losses need to ease, Nikkei need to regain 10,000 level and Japanese currency implied volatility bull run needs to backpedal. Said in other words US$ Yen recovering to 110 level and Euro Yen recovering to 135 (I doubt it on a sustainable basis).
Soon I shall update my views on ‘the long, long case’ next chapter. Stay tuned whatever your status: seasoned Forex trader or Ms.Watanabe, I won’t disappoint you. My mantra is plain simple and remains unchanged: money flows, money flows, and money flows.
Speaking about money flows; situation is gradually improving. January - March 2009 (Q4) net money flows (subscriptions minus redemptions) into publicly distributed investment trusts are growing again albeit at much slower pace compared to last year (less than 7 % of July October 2008 figures).

Now what to buy?

More than ever when screening deep value Japanese stocks requires:

  1. Pain tolerance
  2. Strategic vision.

Both indicators have been tested to the limits since late 2007.

As we enter earnings forecasts season, consensus remain negative. At 8900 level Nikkei listed companies average PBR roughly equals 1. Looking at individual stocks Price Book Ratio seems stuck around 1 as some kind of invisible barrier. This looks very true for Steel stocks for example. Large cap steel makers should register losses up to March 2010, bottoming out at book value seems the rule considering Steel stocks usually trade between 0.9x 1.2x when earnings decrease.
By analysing past 10 years large steel makers PBR current situation is similar to year 2000 when the whole sector was under severe restructuration. Then in 2003 Japanese Steel makers enjoyed strong re-rating by investors, for example Tokyo steel which  suffered close to 9 years uninterrupted losses suddenly turned profitable in March 2003, this finally spread to the whole sector. The main reason behind earnings jump was China steel demand. Between 2001 and 2003 Chinese demand had grown + 20% and finally Large steel makers PBR jumped above 1 as investors shifted their attention from book value to earnings potential (growth).
What is the picture now? Some analysts believe that current fiscal year second half production collapse and inventories appraisal losses are already factored in stock price. Analysts are already shifting their attention to fiscal 2010 first half expecting inventories adjustment to be cleared, most observers believe Steel makers will publish very conservative estimates (as usual in Japan) leading the market to shift from book value to Per. A recent poll suggested that up to 65% of Japanese companies operating in China think Chinese economy had already bottomed out.
24th April JFE was the first to deliver: March 2009 net profit down 26% with sales up 10% but fiscal year end dividend was increased Y 10 to 30 a good illustration of previous newsletter storyboard.

Desperate Japanese stockbrokers (not housewives) do not spare any effort to attract individual customers:  setting up coffee shops and dedicated ‘mobile outlets’ to woe individuals. For example Nomura securities teamed with Saint Marc Café chain. You can enjoy a coffee break and same time learn about investments in a casual and relax atmosphere. Online brokerage Kabuto.com launched the ‘mobile securities branch’, a bright red truck touring the streets chasing investors where they are.
 Based on Japanese Securities Dealers association numbers brokerages had 2,335 branches by January 2009 end which is 14% more than 5 years ago. Still long way down compared to peak year 1992 (3,298).
 I mentioned it previously but individuals poured massive amounts of money (highest in 18 years) into domestic equities back in 2008 forcing Stockbrokers to be more creative. 


Pascal Jeannenot



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