Ending 2007 with one of the world's worst performing stock markets, Japan is facing a crisis of confidence. Valuations have already fallen to levels not seen in decades. What happens over the next few months will be key in determining what direction the country's stock market takes.
Morgan Stanley's SICAV Japanese Value Equity Fund employs an active, bottom-up, relative value strategy. Its key focus is to identify companies that are undervalued compared to the market.
'Our long-term approach emphasises companies that exhibit attractive business fundamentals such as positive free cash flow, product competitiveness and a sound financial structure, yet are inexpensive relative to the market,' said John Alkire, managing director and chief investment officer for Japanese Equities at Morgan Stanley Investment Management in Tokyo.
'The portfolio is not managed to specific risk objectives or to a targeted tracking error. However, we monitor and manage individual stock risk, valuation risk, diversification and liquidity risk on an ongoing basis.'
Although the Japanese stock market has rebounded since mid-March, the country's economy has suffered for a long period.
The currency has been stabilising and equities in the United States have increased in value. But economic indicators such as employment and consumer confidence have continued to decline. A steadily rising consumer price index (CPI) and durable goods orders have also not been encouraging. There are fears that the economy might weaken further.
Several factors have contributed to the country's economic woes. Domestic consumption and economic growth have been weak. Business investment has fallen. Exporters have been hurt by the weak US economy and the rising yen. 'Japan is arguably facing a political crisis with the Diet [parliament] having been involved in a lengthy and agonising debate before finally appointing Masaaki Shirakawa as governor of the Bank of Japan, while Prime Minister [Yasuo] Fukuda's approval rating is continuously falling, leaving little confidence and uninspiring stewardship,' said Mr Alkire.