In Japan, valuations are now less attractive due to the strong rise in the market and consequently Japanese equities have entered a volatile trading pattern since the start of the year. Beyond this potential period of consolidation, however, Japan’s prospects are reasonable given continued macro reform, robust corporate profitability, the potential for improving corporate governance to fuel greater balance sheet efficiency and increased dividends from companies, robust capital expenditure to service continuing strong Chinese demand and consumption expanding on rising wages.
A key component of this positive view is the belief that the Bank of Japan will only gradually raise rates following the prolonged period of deflation and therefore real rates may decline as inflation returns, providing additional stimulus to real estate and equity markets.
Recent data on China suggest continued robust economic growth underpinned by exports and domestic investment. A gradual shift towards increased domestic investment and consumption as the populace grows wealthier is expected. Many Chinese stocks have had strong rises since the start of 2006 but attractive investment opportunities remain for those with longer term horizons given secular growth prospects.
The Korean market did extremely well in 2005, rising approximately 50 per cent and as a result has seen some profit-taking since the start of this year. Valuations for many Korean companies remain attractive relative to international peers given their strong international competitiveness and growth prospects. Korea’s economy should remain robust in 2006 as domestic consumption takes the baton from exports as the main economic growth driver.
While the Australian economy is well-managed and many of the companies listed there also have high quality management, caution prevails due to unappealing valuations. However, attractive opportunities exist among resource stocks benefiting from strong Chinese demand as well as in the financial sector. Concern remains over consumption given the potential for a further downturn in the housing market and associated drop-off in mortgage equity withdrawal to hit consumer sentiment.
Simon Davis, managing director and chief investment officer, Asian equities at Putnam Investments.
