Japan Currency
Japan, another nation with some fine companies, continues to struggle with the aftermath of its own financial bust, which predated the American one by almost two decades. Many years of fiscal spending, much of it wasteful, has insulated its economy against collapse, but has left it with a huge burden of public debt – about 200 per cent of GDP in gross terms, and about 120 per cent in adjusted terms after stripping out inter-government liabilities.
Its domestic market remains bogged down by sluggish consumer and corporate demand.
Consumers see little growth in their incomes and have to husband their resources to provide for retirement – Japan has the world’s worst ageing-population problem.
Corporations have little debt and big savings, as they can’t see enough opportunities in which to invest at home. Export markets are unusually difficult because the yen is so strong, driven by repatriation of Japanese investment capital from overseas.
Those of us who respect Japan’s formidable technical and managerial resources periodically look for some development that will trigger a new round of growth in sales and profits, such as a significant weakening in the exchange rate. But it never comes.
It is very difficult to find attractive opportunities in Japanese shares.
Resource markets such as Australia, South Africa and the oil producers have suffered from declining commodity prices and investors’ anticipation that the slowdown in the world economy will reduce demand and keep those prices under pressure.
Energy supplies in the biggest single market, the US, are growing more strongly than demand, largely because of the “game-changing” explosion in shale gas and oil production.
Prices of industrial minerals are mainly driven by demand from China and other developing economies, but for the moment continued growth there has been offset by sluggish demand from the still-more-important mature economies.
The longer-term outlook for commodities is encouraging because many factors constrain, or are likely to constrain, increases in supplies. Additional production has to come largely from expensive sources such as shale, deep-water and remote locations requiring costly infrastructure. There are major shortages of skilled technical staff. Political risks and the cost of risk capital impose their own limits on exploration and development.
The immediate outlook for prices of commodities – except for gold, the currency-substitute – remains negative. But we could see prices stabilize later this year if markets start to anticipate more aggressive policy-easing in the emerging markets and some increase in their demand.
Commodities could provide some of the more interesting share opportunities in 2012.
CopyRight – OnTarget 2012 by Martin Spring
