Japan

Japanese growth peaked early in 2004. The first Quarter was strong as optimism spread, the long slump appeared over and some good growth looked likely. Foreigners bought the market until downward revisions in growth forecasts checked their enthusiasm. This produced a good deal of anxiety and it took until late in the year for the Tokyo market to recover most of the ground it had lost in the Summer. The net result (enhanced by Yen strength) was a respectable gain of 6.2%.

The outlook for 2005 is clearly dependent on the US economy. While China will continue to provide regional momentum and Japan’s domestic economy  will very likely move more slowly ahead, without continued strength in US, activity the Tokyo market is unlikely to make much overall progress. However domestic reforms continue and for those with stock picking skills good returns should be available. Small to medium size companies will again be the most attractive.

The Pacific Rim

In the immediate aftermath of the tsunami of 26^th December it is hard to be dispassionate about the potential for investment in the region. However this is principally a human tragedy and, although the economic impact is disastrous at a local level, it will be limited regionally. Thailand, Sri Lanka and Indonesia are not economic powers compared to Greater China, Korea and India, and on the whole we expect Asia ex-Japan to begin 2005 in the same way as it ended 2004 – strongly.

The region is more resilient than in past cyclesand has coped with higher oil prices, domestic election issues and China’s prospective slowdown better than might have been expected. Regional GDP growth is estimated at 7% versus 4.7% globally. Although exports are the key to future growth, as regional economies develop so domestic consumption becomes more significant and gives governments additional flexibility to sustain growth through the economic cycle.  China continues to grow strongly, confounding the sceptics who forecast a hard landing.

We expect that the Asian economies overall will continue to outperform in 1^st Quarter of 2005 and have increased our regional weighting from 2% to 3%.

We recently visited Australia and New Zealand which were two of the best performing markets in 2004 as well as enjoying strong currencies.

It is not difficult to see why. Quite apart from demand for their resources from China and the Far East, both countries have benefited from the bi-partisan economic reforms of the 1980s and 1990s. Having shed the co-op mentality of former times they have not allowed their reform programmes to be diluted by ‘Brownite’ policies. Savings and pension reforms will also result in Government superannuation schemes being enduring buyers of bonds and equities.

Both markets are small but Corporate governance, a former charade, is much improved and economic growth for 2005 looks reasonable assured. The easy money has been made but the outlook for Australia in particular justifies a small exposure in 2005.