Looking aft Japan as fresh market

Press, 10 February 1988, Page 38

Looking aft Japan as fresh market

By

DAVID HAY

How far should we go

to ensure that we have made the best possible investment? Although we have always had to rely on overseas products for the best of some luxury items, New Zealand has no real tradition of searching the world for the most attractive investments. The Japanese sharemarket is now the largest in the world, measured by market capitalisation. (Bigger than that in the United States). So we certainly cannot ignore it if we are searching for the best investments there are. But very few New Zealand investors (or investment advisers) have much awareness of the choices available in Japan for various reasons. One historic reason comes from the many years of exchange controls, when investing overseas was difficult. That situation does not apply now. But when I contacted a selection of brokers I found that not many New Zealanders are investing in the world’s largest market. There are difficulties in getting information, in doing business in Japan, and you need to be fairly wealthy to have full access to the market there. And like many things in Japan the shares are expensive, even in proportion to the profits the companies make. “Enquiries about investing in Japan are few and far between,” said Andrew Ott, of Jordan Sandman Smythe. Since there is so little demand for the services, few brokers are highly equipped for Japanese investment. “But, if clients are serious about investing in Japan (and they have the funds in place), they can. do it.” From Mr Ott’s point of view the Tokyo market is one that “I view as important, and I try to keep up to date. It is part of watching the world.”

But brokers have difficulties in keeping up detailed information about the Japanese market. Michael Sidey, of Forsyth Barr, reminded us of the language barrier, and pointed out: “One of our criteria is to be able to follow the stock and keep clients advised. We have had difficulty doing that with the Japan market in the past.”

Most of us have a similar difficulty with any overseas investment. To make the best investment decisions, we need to have as full an understanding as possible of the situation of the company concerned. But it is always difficult for a nonresident to have as much knowledge as the locals do.

Gavin Randall, of Jarden Corporation, had experienced other difficulties. “There are a good number of constraints on non-Japanese owning shares. A while back some of our clients wanted to register a Japanese holding in their

own names. That could take up to a year, and to sell the holding could take another year.”

The next adviser I spoke to was in a position to have more detailed information about Japan. Robin Hall, of Citicorp Scrimgeour Vickers told me: “We set up in New Zealand to do just that sort of thing.” His company has offices in the major financial centres of the world, including Tokyo, and it provides a service to other brokers whose cients wish to invest overseas. ‘There are technical difficulties,” he agreed. And as well, the Japanese market has remained at a very high level, without being affected by last year’s decrease in share prices as much as most other markets. The brokers all agreed that was another obstacle.

“It can be quite difficult for fund managers in New Zealand to buy a Japanese stock at say 150 times earnings, when priceearnings ratios in New Zealand are in single figures. It takes courage,” said Mr Hall.

Is the Japanese market over priced, and something to be avoided for that reason? Most of the brokers thought not. It could be one of the markets that will be very strong this year, Michael Sidey said. And Robin Hall explained that with the high level of saving by the Japanese people, and the bright outlook for their economy, demand for shares is likely to exceed supply for quite some time.

“The better Japanese companies are very healthy. Their profit outlook is very good and so is their management. My feeling is, if you can’t beat them, join them,” he said.

Not all the companies that we might want to invest in have the same high relative prices. Robin Hall gave me the example of Honda shares. The shares were around 1600 yen before October, fell to 1200 after that and are now back up to 1360 yen (NZ$l6), where the priceearnings ratio is about twenty. “Companies like Honda have their markets mainly overseas. With the strong yen, their sales are being hurt,” he said. But the price might have been marked down more than it needs to be, especially since Honda is adjusting to cope with the situation. Mr Hall continued: “They don’t just sit there and complain, they get on with it.” For instance Honda has established a major manufacturing operation in the United States. The other difficulties (information, and holding scrip) can be overcome, for investors with enough money. “If you have a million dollars kiwi, to invest in two or three shares, I think you would get pretty good service. But if you had $20,000, I do not think you would find anyong in Japan pre-

pared to look after you,” Robin Hall said. For those of us without as many thousands as that, the brokers all suggested the same answer — unit trusts. None of our New Zealand based unit trusts specialises in Japanese investment. But the Qtron share portfolio trust, the National Pacific sharemarket trust, the Tower global equity trust, and the BNZ international equity trust have all included some Japanese investments. And there are several specialist Japan funds among the Australian based unit trusts which are available. One of them reviews the market’s performance in strong terms: “The Japanese stockmarket has proved to be one of the most rewarding of all markets for international investors. Behind this stockmarket performance has been a unique combination of Oriental traditions, entrepreneurial flair, and new technologies which has powered Japan to the very forefront of industrialised nations.” (And the strong Japanese currency has significantly helped the performance of investments when we measure them in terms of other currencies.) There is a new reason for having second thoughts about Japanese investments, and any investment overseas, as well as those we considered — tax changes. The New Zealand Government’s economic statement of December, 1987, includes a provision to tax unrealised gains in the value of overseas investments. (This part of the statement was not affected by the other recent changes announced.)

We could think of the proposed tax provisions as like a customs duty. It will offer some protection to the local sharemarket “product,” but there will still be some buyers who will pay extra (in this case, a share of their profits) for what they see as a superior product. If people believe that the best possible investment is overseas, some of them will choose it in spite of having to share some of the gains with the New Zealand tax system. (Although the tax proposal is not quite as simple as that, since gains are taxed but losses do not reduce the tax on other income.) If we want to have the best investment possible, we might have to consider investments outside New Zealand. If we do, we can hardly avoid considering the biggest market in the world, based on one of the world’s strongest economies. But it is understandable that not many New Zealanders have chosen investment in Japanese companies.

David Hay is a manager at Price Waterhouse, chartered accountants, Christchurch and lecturer in professional accounting at Lincoln University College.