Business & Finance
Business and Finance
Business and Finance
Mon, February 28, 2011
Sun, February 27, 2011
Sat, February 26, 2011
Fri, February 25, 2011 The Japan Equity Fund Announces First Quarter Earnings
JERSEY CITY, NJ--(Marketwire - February 25, 2011) - The Japan Equity Fund, Inc. (
For the quarter ended January 31, 2011, the Fund incurred a net investment loss of approximately U.S. $232,000 (equivalent to a loss of U.S. $0.02 per share). In addition, net realized and unrealized gains from investment activities and foreign currency transactions during that same three-month period were approximately U.S. $9,226,000 (equivalent to a gain of U.S. $0.64 per share).
In comparison, during the quarter ended January 31, 2010, the Fund incurred a net investment loss of approximately U.S. $212,000 (equivalent to a loss of U.S. $0.01 per share). In addition, net realized and unrealized gains from investment activities and foreign currency transactions during that same three-month period were approximately U.S. $2,190,000 (equivalent to a gain of U.S. $0.15 per share).
On January 31, 2011, the total net assets of the Fund were approximately U.S. $99.2 million. The net asset value ("NAV") per share on that date was U.S. $6.86, based on 14,456,819 shares outstanding. In comparison, total net assets on January 31, 2010 were approximately U.S. $88.4 million, equivalent to a NAV of U.S. $6.12 per share, based on 14,446,336 shares outstanding. Assuming the reinvestment of the U.S. $0.055 per share dividend paid on December 30, 2010, the Fund generated an investment return of 9.88% for the three months ended January 31, 2011, when measured against the NAV per share of U.S. $6.30 on October 31, 2010, based on 14,446,336 shares outstanding at that time. During the same period, the Fund's benchmark, the Tokyo Stock Price Index (the "TOPIX Index"), increased by 10.30% in U.S. dollar ("USD") terms.
As of January 31, 2011, the Fund had 99.14% of its net assets invested in Japanese common stocks. The remaining net assets were represented by a short-term USD-denominated time deposit (0.07%) and other assets less liabilities (0.79%).
As of February 24, 2011, the Fund's NAV per share was U.S. $7.05, based on net assets of U.S. $101.9 million. On the same date, the market price of the Fund's shares on the New York Stock Exchange closed at U.S. $6.44, representing a trading discount to net asset value per share of 8.65%.
Market Review and Outlook
The TOPIX returned 12.31% in Japanese yen terms in the three-month period between November 2010 and January 2011. Japanese equities have risen to the forefront of the global investment scene after previously being neglected. However, the catalysts for this change are not the corporate fundamentals, which have remained good in spite of adverse foreign exchange conditions, but the attitude of market participants. Japanese stocks continue to significantly lag names in peer developed countries, such as those in the United States, most of which have regained their pre-Lehman bankruptcy levels. And arguably many global investors have been deeply underweight Japanese equities. Hence the Tokyo market had been in over-sold, or over-neglected, territory. The recent market rally simply reflects a mean-reversion from such an extreme situation, though its pace may be somewhat steep.
Summary of Tokyo market-related themes:
-- Emergence from economic stasis Industrial production (IP) rose 1.0% MoM in November and by another 3.1% MoM in December, following five straight monthly declines (June-October) that aggregated to a drop of 5.4%. More recently, IP is expected to have risen 5.7% MoM in January, on the back of strong export growth. In terms of gross domestic product (GDP), the Japanese economy is expected to recover after it basically tread water in 4Q 2010 following the expiration of various fiscal incentive programs for autos and home appliances. Daiwa SBI forecasts sequential annualized GDP growth of -2.5% in 4Q 2010, +1.5% in 1Q 2011, +2.0% in 2Q 2011, +2.2% in 3Q 2011 and +2.1% in 4Q 2011. Business capital expenditures will be the driver of any economic recovery in 2011. Positive core consumer price index (CPI) growth of +0.2% is expected in 2011, following a contraction of 0.8% in 2010. Despite the fact that deflationary pressure is receding, we expect the Bank of Japan to maintain its zero interest rate policy (along with some of its recently-announced asset purchase programs) through the 2011 calendar year. -- Benign corporate profit outlook According to bottom-up earnings forecasts for 300 major Japanese companies provided by Daiwa Capital Markets, aggregate recurring profits are expected to grow by 14.9% (on 2.2% sales growth) in the year ending March 2012, following partially estimated recurring profit growth of 56.9% (on 4.9% sales growth) in the year to March 2011, assuming exchange rates of 80 yen per U.S. dollar in FY2012 and 112 yen per euro in FY2011. Cost controls will continue to be the driver of an earnings recovery, with wages estimated to rise by just 1.4% in the year to March 2012 following an estimated increase of 1.2% in the year ending March 2011. -- Supply and demand aspects The Bank of Japan initiated a 450 billion yen equity exchange-traded fund (ETF) purchase program in December, although accumulated purchases totalled just 72 billion yen as of the end of January. Overseas investors continued to drive the Japanese equity market, with aggregate net purchases totalling 3.2 trillion yen in 2010. Among domestic investors, trust banks (which represent domestic pensions), net purchased 963 billion yen, although domestic individuals were the largest liquidators of Japanese equities, with net sales of 2.3 trillion yen for the year, including net sales of 2.4 trillion yen between July and December alone. As such, the purchases by overseas investors essentially offset the selling by individual investors. With that said, domestic individuals began actively buying Japanese equities once again in mid-January, and posted their largest week of net purchases since May of 2010. Going forward, we expect to see some seasonal selling pressure from domestic institutions towards the close of the fiscal year in March, and this will have to be absorbed by the purchases of overseas investors, domestic individuals and the Bank of Japan in order for any rally to be sustained. -- Attractive valuations Valuations in the Tokyo market remain attractive, with a current price-to-earnings (P/E) ratio of 16.7 times estimated earnings and a price-to-book (P/B) ratio of at 1.1 times. The average dividend yield also remains attractive at 1.9%, versus the 1.2% yield of the 10-year Japanese Government Bond (JGB). -- Political discounts Led by Prime Minister Naoto Kan, the ruling Democratic Party of Japan (DPJ) government is in the process of shifting its stance from left-of-center to the center by proposing corporate tax cuts and voicing the need for a consumption tax rate hike to pay for social security costs. The government has also called for the "opening" up of Japan through the country's participation in the Trans-Pacific Strategic Economic Partnership (TPP), a free trade agreement proposed by the United States. Although these are all steps in the right direction, sadly, Mr. Kan lacks any solid form of political footing given the split Diet and an ongoing power struggle within his own party that has forced him to seek both cooperation from the bureaucracy and support from the opposition.
With regard to sector strategy, we will maintain our strategy of overweighting Financials and Industrials, while underweighting defensive sectors (Utilities and Health Care) and domestic demand-related sectors (Consumer Staples). Despite concerns over emerging countries given inflationary concerns and political uncertainty, we anticipate robust growth in the global economy, owing principally to stable demand from the corporate sector in industrialized nations. Hence, we prefer cyclical stocks to defensive names. Financials continue to be in oversold territory based on current valuations.
The ten largest industry classifications of the Fund's Japanese equity investments held as of January 31, 2011 were Percentage of Industry Net Assets ------------------------ ------------- 1. Electric Appliances 12.90% 2. Transportation Equipment 12.81 3. Banks 9.72 4. Wholesale Trade 6.23 5. Chemicals 5.99 6. Machinery 5.46 7. Land Transportation 4.08 8. Communication 3.71 9. Pharmaceutical 3.53 10. Retail Trade 3.94 The Fund's ten largest individual common stock holdings at the same date were: Percentage of Issue Net Assets ------------------------------------ ------------- 1. Mitsubishi UFJ Financial Group, Inc. 4.88% 2. Toyota Motor Corp. 3.74 3. Honda Motor Co., Ltd. 3.25 4. Mitsubishi Corp. 2.87 5. Mitsui Fudosan Co., Ltd. 2.33 6. NTT Corp. 2.16 7. Tokio Marine Holdings Inc. 2.12 8. Asahi Glass Co., Ltd. 1.83 9. East Japan Railway Co. 1.83 10. Sumitomo Electric Industries, Ltd. 1.76 QUARTERLY RESULTS OF OPERATIONS Net Realized and Unrealized Gains Net Increase (Losses) on (Decrease) in Investments and Net Assets Net Investment Currency Resulting From Income (Loss) Transactions Operations ---------------- ------------------ --------------- Total Per Total Per Total Per QUARTER ENDED (000) Share (000) Share (000) Share ----- ------ ------ ------ ------ ------ January 31, 2011 $(232) $(0.02) $9,226 $ 0.64 $8,994 $ 0.62 ===== ====== ====== ====== ====== ====== January 31, 2010 $(212) $(0.01) $2,190 $ 0.15 $1,978 $ 0.14 April 30, 2010 397 0.02 4,982 0.35 5,379 0.37 July 31, 2010 (184) (0.01) (6,805) (0.47) (6,989) (0.48) October 31, 2010 435 0.03 3,707 0.26 4,142 0.29 ----- ------ ------ ------ ------ ------ For the Year Ended October 31, 2010 $ 436 $ 0.03 $4,074 $ 0.29 $4,510 $ 0.32 ===== ====== ====== ====== ====== ====== PER SHARE SELECTED QUARTERLY FINANCIAL DATA Net Asset Market Share QUARTER ENDED Value Price* Volume* --------------- --------------- ------- High Low High Low (000) ------- ------- ------- ------- ------- January 31, 2011 $ 7.06 $ 6.23 $ 6.35 $ 5.40 1,710 January 31, 2010 $ 6.54 $ 5.73 $ 5.69 $ 4.74 1,548 April 30, 2010 6.64 5.96 6.02 5.11 1,374 July 31, 2010 6.49 5.76 5.93 4.82 1,067 October 31, 2010 6.47 5.82 5.64 5.10 1,396 *As reported on the New York Stock Exchange.
