Japanese investment bank Nomura International is confident that things will stabilise, however, and that when they do, investors will be keen to get back into Japan as well as other Asian markets.
Here, the bankÆs head of global equity, Hiromasa Yamazaki, and its head of Asian equity, Tomoyuki Teraguchi, talk about the opportunities they anticipate may come out of this and about the bankÆs aspirations to become a bigger player in Asia outside of Japan.
How would you define the sell-down in global equity markets that we have seen for the past month?
Yamazaki: The markets are seeing a consolidation after two to three years of good growth both in big markets like the US and the UK and in smaller emerging markets. I donÆt think it is serious at all as itÆs quite a technical consolidation. Japan has experienced a near 50% gain since last year and is now having a good rest. But psychologically, people who had been enjoying very good markets for a long time became quite rushed to take profits, which means (the selldown) was a little bit too quick.
There are still unforeseeable factors such as US fundamentals and oil prices, but at the moment, particularly in the Asian markets and in Japan, I think we are quite close to the bottom. Valuations are now coming back to more healthy levels, which will favour better-quality markets with more visible and transparent fundamental growth and reasonably reliable liquidity, as well as those that are backed by stronger currencies. These three factors will be quite important and in this respect the Japanese market will be the most promising.
Speaking to investors IÆm encouraged by their quite positive, aggressive strategies for Asian markets, particularly Japan. IÆm sure they are very keen to take advantage of the current technical correction. The previous strong appetite towards risky, high-return investments may be shifting a little bit towards more sound investments, but this doesnÆt mean that the potential in emerging markets is shrinking at all.
Of course we should be very careful and we have to look at market by market and corporate by corporate. In the Asian region, IÆm very keen on the North Asian markets û Taiwan and Korea. That doesnÆt mean that South Asian markets arenÆt attractive at all, but at this time they are bit less interesting.
Teraguchi: In the past, the regional economies were primarily an established production site, not a consumption site. But consumption is picking up in most of Asia, and especially in Korea which is seeing almost a consumption boom. This is a sector we need to monitor closely. Asian people are definitely becoming richer and more materialistic and the sectors and companies that can take advantage of this long-term trend should do well.
What potential is there for Nomura to take advantage of the current downtrend and the recovery you are anticipating?
Yamazaki: Overall this means quite big opportunities for us. Japanese financial institutions have the potential to be quite big equity investors, but even last year they werenÆt big buyers - neither of Japanese nor foreign equity. For them, this technical market consolidation would be the best opportunity to come into the market.
The appetite for equity investments among Japanese retail investors is also potentially quite big, but currently the equity portion of their (combined) financial assets is quite low at about 10% compared with about 35% in the US. If the rest of these individual financial assets (which are now mainly held as deposits in the postal savings system) were to move into any kind of equity asset, the potential for our business would be quite big.
Teraguchi: The amount of the equity investment trust funds are now bigger than during the bubble economy and through these investment trust funds Japanese investors have started to come into both the Japanese equity market and global markets. Emerging markets such as India and Mainland China are popular and a couple of Korean funds have also been established recently.
We are seeing a greater variety of products for Japanese clients and there is also an increased willingness to take on risk thanks to the economic recovery and the recovery in the Japanese equity market. Financial theory says: if the home market isnÆt performing well, people should invest in other markets, but in Japan that is not the case. Only when we have a very good market at home do we invest in foreign markets. At this moment, that is already happening.
Nomura has said for some time that it wants to improve its Asian equities business outside of Japan in order to make the most of its relationships with investors and corporates in the region. What specifically are you planning to do?
Teraguchi: Last year, we tried to beef up sales and distribution, but starting from this fiscal year we would like to focus on improving are trading and product capabilities, including derivatives. In addition to serving our big traditional clients, we have also been putting more energy into developing our relationship with hedge funds. We have done this quite aggressively in the US, in Europe and Japan and now we are trying to do the same in Asia.
We have started a new business that we call synthetic prime brokerage which means that we not only provide stock lending to the client but we also execute the trade and then give the total return from that trade to the client.
By doing this, we make use of our strength as a lending facility particularly for Japanese small cap companies, newly listed companies or other ôhard-to-borrow sharesö. We do not have a big prime brokerage business, but we are very confident that we are the best broker to facilitate dealings in these hard-to-borrow stocks for many institutions.
WhatÆs your target with regard to the development of your Asian business?
Yamazaki: We would like to be one of the leading brokers in Asia. At the moment we are lagging the US and European investment banks. Our recent activities, such as the initial public offering of Lotte Shopping (in Korea), show that clients are gradually appreciating our ability and potential as well as NomuraÆs whole business network. In order to become one of the leading brokers, however, we need to develop the quality of all our services, including research and trading, and increase the variety of our products.
Teraguchi: This is a sort of franchise business. If we donÆt have a strong franchise in this region, then even when we grow our Asian equity product, we wonÆt be able to achieve anything. Starting with Lotte Shopping, both on the equity and investment banking side, we are quite confident that we will be able to show (potential clients) how our strong research and origination capabilities are taking advantage of our beefed up franchise. So hopefully you are going to hear about Nomura deals more often in the near future.
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