By Patrick Rial and Shani Raja Oct. 30 (Bloomberg) — Standard Life Investments Ltd. has sold Japanese machinery-maker stocks and ING Investment Management cut holdings of the country’s banks amid concern the new government will fail to revive growth. The two money managers, with combined assets of $705 billion, have smaller percentages of their holdings in Japanese stocks than are represented in benchmark indexes. They plan to stay that way even though the shares this month are, on average, the cheapest they’ve been since May 2008 versus all developed countries’ stocks, as measured by net assets. Japan’s Topix declined 2.3 percent so far this month, compared with a 1.6 percent drop for the MSCI World Index of developed economies’ shares. The Japanese benchmark lost 5.8 percent in September, the worst return of 88 national indexes tracked by Bloomberg. Equities fell as Prime Minister Yukio Hatoyama’s government fueled speculation it will tolerate a stronger yen and advocated letting some borrowers delay repaying bank loans. Hatoyama’s party ended the Liberal Democratic Party’s five decades of almost unbroken rule in August. “The whole Japan election thing has been really disappointing,” said Philip Schwartz , who manages $1.2 billion of ING’s $505 billion in assets as head of international investing in New York. “There’s little going on to structurally change what needs to be structurally changed,” he said, adding that Hatoyama’s Democratic Party of Japan should do more to stimulate the world’s second-largest economy. Deflation Sign Japan’s economic growth of 1 percent next year will lag behind the U.S.’s 2.4 percent and China’s 9.5 percent, median estimates in Bloomberg economist surveys show. Japanese businesses plan to cut capital spending by 10.8 percent this year, according to the latest quarterly Bank of Japan survey of large companies. Consumer prices , excluding fresh food, fell a record 2.4 percent in August, signaling a return to deflation. The nation’s stocks are trading at close to the biggest discount to the MSCI World Index in 17 months. The Topix’s ratio of price to companies’ net worth, or book value, was 1.1 yesterday, compared with 1.7 for the MSCI gauge. This month’s average gap between the two ratios is 0.65, more than any time since May 30, 2008, data compiled by Bloomberg show. The Topix is less expensive by that measure than benchmark gauges in the U.S., U.K., Hong Kong and 17 of the 19 other developed countries represented in the MSCI index. Ireland and Italy are the only cheaper ones. Unsustainable “If you measure Japanese equities with a price-book ratio, they are cheap,” said Naoki Fujiwara , who helps Shinkin Asset Management Co. oversee $4 billion as chief fund manager in Tokyo. “But the current prices aren’t sustainable unless earnings grow faster.” Based on prospects for profits, Japanese shares are the most expensive among the world’s five biggest markets, Bloomberg data show. Topix-listed shares trade at 37 times estimated net income for this year, more than twice the level for the Standard & Poor’s 500 Index in the U.S. and at least 72 percent higher than benchmarks in China, the U.K. and Hong Kong. “When we look at things from the bottom up, we think we’re looking a long way out into the future to justify the level of the market,” said Robert McKillop , a Standard Life strategist in Edinburgh who has worked in the industry since 1994. “Some parts of Japan look more expensive now than the bulk of the time that I covered the market.” Robot Shares Standard Life has been selling shares of companies that produce manufacturing machinery because their valuations have become pricey, McKillop said, declining to name specific stocks. The global economy is likely to grow slowly, hurting Japanese manufacturers because they rely on capital spending by businesses, he said. Fanuc Ltd. , the world’s largest industrial-robot maker, is trading at 69 times analysts’ median forecasted profit for this year. Over the last decade, the stock price has averaged 31 times the previous year’s earnings, Bloomberg data show. Mori Seiki Co. , a machine-tool manufacturer that hasn’t produced profits since 2008, won’t make money until the year ending March 2012, according to median predictions. Shares of both companies are up more than 40 percent from lows in the past 12 months. ING’s Schwartz said his firm was “a little more” invested in Japan than rivals in the run-up to the August elections. During his campaign, Hatoyama vowed to revive the economy with increased child-care spending, tax cuts and curbs on bureaucrats’ power. Disappointment with comments from the new government prompted ING to reduce its holdings, Schwartz said. Loan Moratorium Shizuka Kamei , the new financial services minister, said on Sept. 15 he wants to let small businesses delay repaying bank loans for about three years. Kamei said a month later that the government will compensate banks for losses tied to any repayment moratorium and that participation will be voluntary. Kamei is introducing his loan moratorium bill during the session of parliament that started this week. Schwartz remains wary of financial stocks . “We’d taken a bit of a risk on the financials, thinking they were in a little bit better shape going into the election,” said Schwartz. “Suddenly, we were concerned about capital requirements again,” as international regulators consider forcing banks to hold more reserves, he said. Shares of Japan’s three biggest listed lenders, Mitsubishi UFJ Financial Group Inc. , Sumitomo Mitsui Financial Group Inc., and Mizuho Financial Group Inc. have lost at least 18 percent since Sept. 1. Capital Needs The three have issued new shares in the past year to shore up balance sheets and together need an additional 1 trillion yen ($11 billion) to 2 trillion yen in capital, said Citigroup Inc.’s Hironari Nozaki , the top-ranked banking analyst in Institutional Investor magazine’s latest annual poll, in a Sept. 10 report. The consumer-loan business has been under pressure since 2006, when new laws capped interest rates and allowed customers to demand refunds for loans that exceeded prior limits. Aiful Corp. , the third-largest bank by revenue, has plunged 51 percent since the end of August as it sought to restructure debt and lay off workers. Acom Co., the second biggest, slumped 38 percent after saying first-half profit fell 85 percent below its original forecast. Kamei also scrapped plans to turn the government-owned Japan Post Holdings Co., a mail service and savings bank, into a private company with an initial public offering. In 2005, then- Prime Minister Junichiro Koizumi pushed legislation through parliament authorizing the sale of the world’s largest bank by assets, fueling a 44 percent surge by the Topix that year. ‘Currency Talk’ The yen’s rally made matters worse, Schwartz said. Fueled by Finance Minister Hirohisa Fujii’s Sept. 16 comment that he doesn’t support a “weak yen,” it reached 88.01 per dollar on Oct. 7, the strongest since January. It has lost ground since, ending at 90.36 when Japanese stock trading closed yesterday. “We were further disappointed by the currency talk,” Schwartz said. “It was a particularly unfortunate set of things that came together.” Fujii’s remark stoked speculation the government won’t hold down the currency to help exporters, as Japan has previously done. A strong yen lowers the local value of overseas sales and gives rivals outside Japan a price advantage. Japan’s large manufacturers are, on average, using a weaker 94.08 per dollar estimate to forecast profits for the six months ending in March, according to the central bank’s Tankan survey. Fujii on Oct. 15 denied that he had ever said that a weaker yen was bad or that a strong yen was good. “The first driver of underperformance for Japan is the unclear stance of the government, which has led to the massive strength of the yen,” said Florence Barjou , a strategist at Societe Generale SA’s Lyxor Asset Management in Paris. “We’re not so sure about the medium-term growth potential in Japan, and in the longer term, it’s clearly not one of our favorite themes,” she said. Her firm, which manages $8 billion, also is “underweight” Japanese equities. To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net ; Shani Raja in Sydney at sraja4@bloomberg.net .
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