By ADRIAN LOWCOCK 17/08/2010
The figures from the National Accounts of Japan show its Gros Domestic Product (GDP) grew only by 0.1% last quarter which has resulted in China taking over as the second largest economy. It was only a matter of time before this happened, given China’s growth of GDP is 11.1% (an annualised quarter on quarter basis). However economic growth does not necessarily translate into stock market growth. Investors should consider this point before investing in either country.
Japan
Japan is often unloved by investors as positive returns have been hard to come by over the last 25 years. The situation in the country remains just as unclear today. There is still the issue of an ageing population, unsustainable structural deficit and a political system which protects its own interests. These are well known long term issues, but the short term issues are just as likely to affect performance of the stock market. Japan is a large exporter and therefore dependent on economic growth for its economy to grow. So any signs of weakness in the global recovery and any concerns over entering a double dip recession will affect Japan more than other countries. In addition the currency is strong at the moment which is affecting exporters and economic growth.
However, on an historic basis the Japanese stock market continues to look extremely cheap close to a 40 year low, there are plenty of companies with dividends yield’s over 10%. The country is full of world class companies well placed to benefit from the economic growth, particularly in technology. In addition, so long as interest rates remain low in the West the Japanese Yen plays the role of a ‘safe haven’ currency along with the dollar.
Our view
Japan has had so many false dawns that investors are tired of hearing how this time it will be different. And for the reasons mentioned it is not clear it will be different. However, Japan is a strong play on economic recovery and growth, if fears of double dip recession fade and Asia roars then we could see the Japanese stockmarket perform. We recommend having some exposure in Japan, around 6%. Our top rated fund in the sector is GLG Japan Core Alpha.
China
The economic growth in China is staggering, as the world’s largest exporter it accounts for 1 in every 10 items exported round the world. However, this is not where future growth will come from, as demand for goods will diminish in the west and with a growing middle class the belief is domestic demand will replace it, which will help drive the next phase of growth in China. Chinese households currently spend little more than 35% of GDP on consumption, and savings have risen from $6.45 billion in 1998 to $2.47 trillion in 2007. The country has a young growing population which will help drive demand and China’s currency has been viewed as too weak for a long time. Given government’s willingness to allow it to appreciate investors could see healthy returns from this aspect alone.
However, the stock market currently yields around 2.6% and is valued at a PE of 14.4 which is not cheap, nor particularly high yielding. Fears that Chinese growth may stall due to European austerity measures and the government’s tightening of the domestic property market exist, although in the age of austerity fears exist over economic growth in most countries, for the short term at least. Currency will also play a significant part and the government has allowed it to appreciate slowly to avoid overheating in the economy.
Our view
It is likely that China will continue to grow strongly, although the rate of growth may slow as the transition from exporter to domestic consumer will not be an easy or smooth journey. And as alluded to economic growth does not necessarily translate to stock market performance. There are many internationally focused companies which will benefit from the region and indeed countries geographically close to China will also benefit from the domestic growth. Investors should seek exposure to China through a diversified fund in the first instance - such as First State Asia Pacific Leaders, or First State Greater China Growth for those looking to add to their Asia/Emerging markets exposure or wanting to take on a bit more risk.