Japanese corporate outlook is optimistic

Old Mutual Asset Managers says the outlook for corporate Japan is positive, although the market is unlikely to be as strong as in 2003. Foreign investors have flooded back into the Japanese market and now make up 20% of the overall stockmarket, but are buying particularly into quality equities as corporate governance improves.
Les Jones, manager of the Old Mutual Japanese Select fund, says the changing environment, strong growth prospects and attractive company valuations offer plenty of opportunities for investors, although risks remain.
A key change is in investor sentiment, he adds, as he sees the end to the deflationary psychology, which will benefit the massive bad loan overhang by reducing the size of the debt in real terms. He is looking for signs of a pick-up in consumer spending.
Japan has also benefited from increased growth in China as a major foreign direct investor, but it is still dependent on US economic progress, says Jones: “The yen/dollar exchange rate is still likely to be the largest single determinant of the macroeconomic outlook in Japan.”
As a result, he has increased his exposure to domestic demand stocks. He is neutral in electrics at 21.1% of his portfolio (at November 30) and motors (2%), underweight banks (9%) and overweight engineers (11.2%).