Japanese equities are again oversold, unloved, and undervalued to the point where in the past the market has managed to post subsequent relative outperformance. However, it may be some months before Japanese equities decisively outperform, given the headwinds of a strong yen and uncertainty surrounding economic policy and the strength of the global economic recovery.
The year 2009 will reveal whether Asia’s growth over the past few years reflected real structural changes rather than debt-fueled U.S. consumption.
While the macroeconomic outlook for Japan is not encouraging, Japanese equities have gone the furthest in pricing in a dismal 2009. Given the market’s depressed valuations, it may not take much to spark a rally, especially if the global economy begins to stabilize.
Some Japan managers have or might be expected to migrate to the small-cap sector because it offers good value, but investors that agree with this strategy need to have staying power.
While the impressive run-up in Asian equities has caused us to become more cautious on a tactical basis, it has done little to change our long-term bullish outlook for the region.
Negative investor sentiment and susceptibility to the effects of a global downturn make Japanese equities a risky short-term proposition, but valuations, relatively steady economic fundamentals, and strong corporate profits argue for an overweight position on the part of those with the patience to tolerate any potential short- to intermediate-term underperformance.
Benchmark indices for Asian small caps differ significantly, indicating the substantial judgment required of managers in this space.
This report focuses on the listed Real Estate Investment Trust (REIT) markets in Asia, especially the larger such markets of Japan, Singapore, and Hong Kong. The discussion also expands to include the smaller markets in Malaysia, South Korea, Taiwan, and Thailand, and the larger Asia Pacific region which includes Australia’s LPT market.
Despite the potential for short-term bumps in the road, the Asian growth story remains compelling.
Investors in China-based indices should recognize their new exposure to the big Chinese banks in the aftermath of the banks’ IPOs—and the potential risks inherent in such exposure.