Update: Japan

We wrote about Japan a year ago, stating that the situation there was still ugly. Since then, it’s gotten even uglier! Despite having fallen 72% from the 1989 peak, the Nikkei 225 fell another 28%, in local currency terms, for the year ending 3/31/03. Globally, much has happened in the last year, but not in Japan. Sure, there’s been a war, the world economy looks sluggish, the dollar is weak, etc., but the real issue in Japan is still banking-sector reform, and it’s still not happening. As usual, politics have gotten in the way. Once it became clear that Prime Minister Koizumi’s plan for reform was completely deadlocked, foreigners turned from net-buyers to net-sellers, precipitating the most recent decline; stock prices are now at levels last seen in the early 1980s. 

Is there any reason for optimism about the stock market? Well, the Koizumi government could well be toppled in the next few months. Realistically though, a new cabinet would still be dominated by the LDP, which most likely means that some stock price-boosting measures are about the best we can hope for. More promising though, are equity valuations, which are becoming more reasonable. Also, the economy is fairly stable. These factors could generate buying interest at current prices, but action on the banking sector problem, real and probably radical action, will still be needed for stocks to finally hit a secular bottom. Sadly, this seems like a pipe dream.

Stock Comment

Recently we purchased shares in IMS Health (15.5), the world’s leading provider of market research to the pharmaceutical and healthcare industries. In 1996, IMS went public for a second time in the breakup of Dun and Bradstreet. At that time we felt the valuation was too rich and did not trust top management who came over from D&B. Now trading at the same price as in 1996, IMS has a new management team and a cleaned up corporate structure (after the spin-off of a subsidiary). Another catalyst is the transition from being just a data collector to a provider of analytical tools and consulting. Barriers to entry are high in the worldwide data collection business resulting excess free cash flow. IMS should earn $1.10 in 2003 and trades at a 15 X PER with a 15% long- term growth rate.