Time right to buy Japanese stocks, say managers

By Muralikumar Anantharaman

NEW YORK (Reuters) - Japanese stocks, especially smaller ones, are attractive after a poor year as they are cheap, the world's second largest economy is growing reasonably well and corporations are mostly healthy, fund managers said.

"Japan has been horribly beaten up. I think it's the ugly stepchild of the region, but there are a lot of reasons to be positive about the economy," Andrew Foster, a fund manager with Matthews International Capital Management, said.

Speaking at the Reuters Investment Outlook 2007 Summit in New York this week, Foster said smaller financial services firms and those geared to domestic services-related sectors provided the best opportunities for long-term gains.

He declined to discuss specific stocks. The $292 million Matthews Japan Fund has almost half of its portfolio in mid-cap and small-cap stocks and about a third of its holdings in the financial sector.

After a strong 2005, when they rose 44 percent, Japanese stocks are among the worst performers in 2006 so far, with the TOPIX index .TOPX barely up 0.12 percent. Smaller companies have been particularly hard-hit, with the Mothers index sinking 55 percent this year.

"Clearly, there are some opportunities in the smaller segment of the market," said Reiner Triltsch, head of international investments at U.S. Trust Co.

Even the broader market was attractively valued, with Japan trading at just 2 times price-to-book compared with 2.8 times for the United States and 2.4 times for Europe excluding the UK, Triltsch said.

"The last time Japan was that reasonably valued, I don't think anybody can remember," he said.

Triltsch's Excelsior International fund owns Japanese firms among its top holdings, including Sumitomo Trust & Banking Corp. (8403.T: Quote, Profile, Research, Stock Buzz) and Canon (7751.T: Quote, Profile, Research, Stock Buzz).

He said while the Japanese economy seems to have softened a bit recently, the positive impact of consumer spending will start to be felt as unemployment was falling.

Foster of Matthews International said while Japan's 2 percent growth was not "fantastic," it was "decent" and compared well with growth in Europe.

"It's been growing consecutively for about 16 quarters," he said, adding that what was most encouraging was its growing economic linkages with the region, especially China.

Foster also said smaller companies, which are mostly well-run and make up three-fourths of all listed stocks in Japan, will benefit from the economy's growth.