Japan Real Time Charts and Data

Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Japan related comment. He also maintains a collection of constantly updated Japan data charts with short updates on a Storify dedicated page Is Japan Once More Back in Deflation?

Monday, November 26, 2007

Moving Money Into Emerging Asia

Two minor pieces of news caught my eye over the weekend. In the first place Bloomberg draws our attention to a Goldman Sachs report about hedge funds shifting Asian investments out of Japan (because of lower returns and poor corporate governance) to other areas of emerging Asia.

Japan's average return on equity will be about 10.2 percent this fiscal year, compared with 20 percent in the U.S. and 15.7 percent in Asia, according to Matsui. Return on equity is a measure of how well a company uses its cash to generate profit.

Meanwhile, Japanese companies are fending off purchases by foreign firms seeking to boost share prices, by buying stakes in each other or taking so-called poison pill measures. Some 400 Japanese companies, or 10 percent of all publicly traded firms, have taken steps to ward off hostile takeovers, according to a Nikkei newspaper survey published in October.

Hedge funds investing in Japan have seen outflows of about $7 billion, while Asia ex-Japan has seen inflows of about $17 billion through October this year, according to data provided by Eurekahedge, a Singapore-based hedge-fund research company.

On another front the New York Times reported on a growing trend in Japan among individual investors for reallocating funds they have invested in the U.S. to faster growing emerging markets. Japanese investors, it seems, have reduced holdings of domestic mutual funds investing in the U.S. in 16 of the past 17 months.

In fact investment inflows in overseas-oriented funds have consistently grown at a higher clip than the outflow from U.S. funds. An estimated half of Japan's $14 trillion in personal savings is believed to be invested overseas in search of higher returns, especially in terms of yield, given Japan's extraordinarily low returns on deposits and bonds. At the same time, Japanese investors are gradually beginning to diversify their holdings, after having only embraced mutual fund investing about a decade ago. According to data from Daiwa Fund Consulting, Japanese investors have invested the dollar equivalent of $17.5B into emerging market funds over the past year, while reducing holdings of North American funds by $4B. Fund management companies have taken notice, resulting in a 36% increase in the number of emerging market mutual funds to 183 in total (vs. 137 U.S.-focused funds).

Conclusion: hedge funds are reducing their involvement in Japan, and Japanese investors are reducing their exposure to the US, and they are both headed for emerging markets, and in particular emerging Asia and Latin American where a favourable combination of both assett price apppreciation, higher interest rates and currency appreciation appear to offer a much better longer term return. Morgan Stanley's Stephen Jen got near to the core of the issue last Friday when he pointed out that:

"If one had invested US$100 in 1985, the investment would be now worth US$739 for global real estate, US$639 for equities, US$403 for global bonds, US$264 for non-energy commodities and only US$182 for crude oil (including the recent surge in oil prices toward US$100 a barrel)."

So where in the world are equity and real estate values about to get (in dollar terms) the big ride up? I don't think the answer to this question is too taxing, even your average garden-variety hedge fund manager has the capacity to see this. The real question is how fast will it all happen, and has the dollar past an interim "point-of-no-return", or are we about to see a temporary dollar resurgence? Very hard to call this one, I think.

Afterthought: there does seem to be news to suit all tastes and appetites though, since Bloomberg also report that the rumourology has it that the Chinese government - via China Investment Corp. - is considering investing money in Japanese real estate. I would have thought the interests of their citizens would be better served by putting the money in Indian, Turkish or Brazilian real estate, but then, as they say, there are opinions around at the moment to cater for all tastes.

You can find a better explanation of the logic which I think is driving all of this in this post here.