Japan a basket case again
Dresdner chief investment officer Andrew Hunt explains his view of the global economy.
Thursday, November 9th 2000, 9:50AM
The Japanese sharemarket provided international investors with great returns last year, but don't expect a repeat this year, Dresdner RCM Global Investors chief economist Andrew Hunt warns.
Hunt, who is in New Zealand this week doing presentations for Guardian Trust Funds Management, says that Japan has once again committed economic suicide.
"Japan's economy started to recover last year but a Bank of Japan policy mistake has stopped the economy once again," Hunt says.
Last year's corporate renaissance was particularly amazing because companies had enough money to expand output and capacity while repaying debt.
This situation came about because the Bank of Japan lent reserves to the banks at zero cost, and the banks used these reserves to fund massive lending to the Government, thus funding the budget deficit.
"The policy helped rebuild bank profits and spared the financial markets from having to fund the deficit, creating a more positive environment," Hunt says.
When the bank increased interest rates earlier this year, it took away the incentive for banks to lend into the Japanese Government bond market. Without the banks buying bonds it has been hard for the Government to issue debt without collapsing the price.
Consequently the Government has been forced to spend less money than it did before.
Hunt says that the monetary and fiscal tightening, plus the oil price rises do not bode well for industrial output going forward.
"The oil shock and slower economy pose a very real risk to Japan's long-term growth, particularly since Japan may be over-building capacity."
"Japan's economic growth next year will be a round zero," Hunt says. Consequently Dresdner is under weight in Japan.
Hunt says getting Japan right is vitally important for international investors as that country still plays a major role in setting the world economic agenda and as it is the largest exporter and it sets the price for many products and commodities.
"Japan determines a lot of pricing in the world economy."
He also points out that Japan's problems have flow-on affects in Asia because it does so much trade in that region.
To get back on track Japan will have to change its policies, he says. This is not likely to happen until a new governor is appointed to head the Bank of Japan.
The US and us
Meanwhile, much investor attention is currently focussed on the outcome of the closely fought US presidential election campaign and what affect it will have on that country's 10 year bull run.
Hunt's view is that if George W Bush wins the race and his Republican party wins the Senate then the US sharemarket will bounce higher.
The opposite outcome, a clean sweep by the Democrats, would be the one scenario the markets would worry about.
However, if the results were split, one party in the White House and the other controlling the senate then the status quo would remain.
His view is that any reaction to the election results will be a short, sharp knee jerk reaction which doesn't last for long.
Hunt says if Bush wins then the pharmaceutical sector will do well and interest rates are likely to rise because of massive tax cuts. With a Gore victory the HMO sector will do well, he says.
On the state of the US economy Hunt warn investors to expect a slowdown in economic growth, and single digit returns from the sharemarket.
The big issue, Hunt says, is that the economic expansion has been funded by debt and share offerings such as IPOs. However, now it is getting much harder for companies to raise the necessary capital.
Hunt's view is that as normality returns the old encumbants, particularly the ones with strong balance sheets which can fund their own expansion, will start to do a bit better.
"We could see a switch from the new entrants to the old encumbants," he says.
For example in the telecommunications sector the companies currently out of vogue may win investor favour They can slow down their capital expenditure programmes (which are being driven currently by pressure from new entrants), consequently their returns on sunken capital will improve significantly.
Hunt reckons that economic growth will slow down from 6% to about 2% in 2001.
While this scenario may feel like a hard landing it probably won't be too much of a bump.
Europe: One union, many problems
Dresdner's outlook for Europe is a mixed bag with different views for different countries.
"Europe is by no means homogeneous, but markets tend to equate Euroland and Germany as being the same. This year, Europe should grow strongly, but Germany may not be able to sustain this growth in 2001. France and Italy should maintain their growth through into 2001 but there is the potential for EMU strains to emerge over particularly Ireland as the EuroBubble bursts."
The problem with Euroland, he says, is that it is difficult to have one set of policies for the component countries as they are all in different phases in the economic cycle.
Dresdner currently is overweight the US, neutral on Europe and underweight in Japan. Hunt says these positions are more to do with stocks than country's as the company takes a bottom up stock picking approach to investment.
The sectors he likes are pharmaceuticals, finance and insurance. He is selective in the technology area (generally underweight hardware and overweight software) and cautious about banks because they will by hit by bad debts if things start to go wrong in the global economy.
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