Hedge funds favor Japan's outlook
Selling AOL, WorldCom and buying wireless in Asia
By Emily Church, CBS MarketWatch
Last Update: 3:59 PM ET Jul 14, 1999
Econ.forecast
Banking stocks
NEW YORK (CBS.MW) -- Some U.S. hedge funds are buying into the
Japanese recovery, betting its economy has bottomed out, and one
manager has sold U.S. large-cap stocks as part of the shift.
If investors only pay attention to "the sell-side
analysts and Western press, you would think Japan
was on the verge of collapse," said Raj Gupta, who
manages the Epoch Funds and G10 Macro Group.
"The sleeping giants are finally beginning to wake
up and are prepared to join in the spending boom,"
he said, referring to consumer confidence in Japan
and Europe as well.
It's been less than a year since the Asian economic
crisis roiled the world's stock and credit markets,
slamming the hedge funds. Yet the near 33 percent
year-to-date rise in the Nikkei is proof of foreign
investors' change in sentiment toward Japan, even
as most commentators note that the Japanese
themselves remain net sellers of Japanese equities.
Seeing green
Japan's fiscal stimulus package has sown the seeds
and "the green shoots of recovery are becoming evident," Gupta told a
room of fund managers at a Managed Funds Association conference in
New York. "It's a dangerous time to bet against the Japanese economy."
The health of the Japanese economy is the subject of great debate among
economists, with many U.S. commentators skeptical about the banking
sector's drag of bad loans.
"There's quite a difference of opinion about the outlook for Japan," said
Josh Feinman, chief economist at Deutsche Asset Management Americas.
"Asia is picking up and that should be beneficial for Japan ... yet a lot of
people think the structural changes (in Japan) have a long way to go.
"Japan's economy has been doing better than it has in a year," he said.
"It's a question of degree. Has it really turned the corner and is headed
toward a self-sustaining recovery?"
Year-to-date, the average global hedge fund was up 10.7 percent
through the end of May, according to Van Hedge Fund Advisors
International.
Non-bank play
In the first quarter of this year, David Gerstenhaber, president of
Argonaut Capital Management, said he began a portfolio adjustment,
suspecting that "global economic growth would surprise on the upside"
after a round of global central bank easings. As a result, their exposure in
Japan has climbed from near zero as a percentage of net asset value to a
top of 35 percent, he said.
In common stocks, Gerstenhaber looked for companies he labels part of
"the new Japan." In other words, the Argonaut funds stayed clear from
manufacturers and banks. Nikkei composites weren't well represented.
The funds invested in
non-bank financials
like Takefuji, which
lends to consumers
and the Shokoh Fund.
Other plays include
deregulation and
technology, leading to
telecom giant NTT
(NTT: news, msgs)'s
NTT DoCoMo
majority-owned
wireless subsidiary and Mitsui Petrochemical.
The Asian bet has taken Argonaut to Korea and "cheap financial assets"
like Pohang Iron and Steel, a low-cost steel producer, and several
Korean banks. The funds have returned 37 percent year-to-date.
AOL out of favor
Last fall, Argonaut moved into large-cap stocks and Internet stocks like
America Online (AOL: news, msgs), Cisco (CSCO: news, msgs) and
MCI WorldCom (WCOM: news, msgs), looking for the names to deliver
topline growth and to absorb liquidity as the Federal Reserve pumped it
into the system.
Beginning in the second quarter of this year, it was clear to Gerstenhaber
that the "mania" in the Internet stocks "was not justified by the underlying
fundamentals." Moreover, a stuffed, Net-heavy IPO calendar was raising
concerns "at the same time of renewed global growth." As a result,
Argonaut began selling some U.S. holdings at the end of the first quarter
and "aggressively in the second quarter," he said.
Among those sold: Pfizer (PFE: news, msgs), AOL and WorldCom.
Among those bought: Alcoa (AA: news, msgs), Dow Chemicals (DOW:
news, msgs), Halliburton (HAL: news, msgs), Ingersoll-Rand (IR: news,
msgs) and Noble Drilling (NE: news, msgs). Gerstenhaber told the money
managers that he also liked Smurfit-Stone Container (SSCC: news,
msgs), saying that liner board is a play amid improving global demand, as
well as semiconductor makers Micron (MU: news, msgs) and National
Semiconductor (NSM: news, msgs) and Teradyne (TER: news, msgs)
and Novellus Systems (NVLS: news, msgs) on the chip equipment side.
He expects a
European upturn "to
be more muted," and
is invested in Nokia
(NOK.A: news,
msgs) and
Mannesmann and
Vodafone (VOD:
news, msgs) among
others.
Doubts remain
Not all fund managers are keen on Japan, noted George Van, chairman of
the fund advisor group.
"There's still a lot of caution, even if there is a glimmer of optimism. Some
of them got burned on the yen-carry trade and that hurt the macros," Van
said.
Some of the U.S. funds are linking forces with Japanese banks and are
getting directly into restructuring by buying bad debt at a discount.
With a yen-carry trade, investors take advantage of near-zero short-term
rates in Japan by borrowing yen and buying higher-yielding assets like
Treasurys. Many of those trades were "unwound" in June when the dollar
and Treasurys fell. Also see Bond Report.
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