Japanese EquitiesJanuary 2013
Japan is cheap versus history…Despite the ‘Abe-nomics’    Dividend Yield / Price-to-Bookrally, the market remains   3.5%  ...
… and other markets…… although the rally has   Dividend Yield(just) closed the yield    4.0%advantage over the US         ...
…and has underperformed other major marketsJapan has been de-rated          Japan Relative Performancewhilst going through...
… although Spain may be cheaper …                                                                   CAPE ratios – deviatio...
We are positive on Japanese EquitiesNothing new – Japan’s been      •   Valuations are extremely lowcheap for a while…    ...
Companies have cut costs aggressively…                                        Breakeven Ratio (companies with capital >¥1b...
…improved free cash flow dramatically…                           Free Cash Flow and FCF Yield (all industries, 4 quarters ...
…rebuilt their balance sheets…                              Net liquid assets of all Japanese corporations (¥ tn)         ...
…and invested overseas…                                        Japanese automaker production volume in Japan and overseas ...
…where                returns are higherJapan is doing much more                                     RP margin for domesti...
The export mix has changed dramaticallyEmerging markets are now                                  Export values by destinat...
Japan is highly competitive      Unit Labour Costs (rebased 100 in 2000, FX adjusted)                                     ...
Japan still has its Global Leaders                          Autos and autoparts            Nissan, Toyota, Denso          ...
It’s not just an export storyProfit margins have improved               Non-manufacturing profit marginssharply in non-man...
The domestic economy is relatively robustThe recovery from the          SME Confidence indices in Japan and USearthquake a...
Deflationary pressures are easing…       Inflation (National CPI x fresh food and energy, YoY%)                           ...
…with the BoJ playing its part…The Bank of Japan has been        Bank of Japan holdings of JGBscriticized for not expandin...
… and animal spirits are returning?       Tankan: Lending attitude of banks for mid-cap enterprises                 Tankan...
M&A boom in JapanJapan’s companies developed      Cross border transactions by Japanese companies ($bn)an appetite for acq...
Dangerous debt position?     Gross Government Debt as % GDP                       Net Government Debt as % GDP            ...
Debt servicing costs are lowInterest payments remain at a   Interest Payments as % GDPvery low level compared toGDP.      ...
What funding crisis?                                  Net foreign assets vs foreign holdings of government debtJapan is th...
What funding crisis?        •   All the ratings agencies have downgraded Japan over the last couple of years        •   Th...
Politics – lots of leaders, no leadership…                                                        USA                     ...
Demography – everyone else is on the demographic cliffOne of the many headwinds         Elderly support ratio – number of ...
Investors in general still sceptical                          •   Perception that Japanese companies no longer competitive...
Large parts of the market are being totally overlookedPercentage of companies with   Stock coverage: Number of analysts S&...
Potential catalysts                          •   Recovery in domestic demand                                –   post-earth...
Pictet core Japanese equity fundsWe manage our funds with a strong bottom-up approach within a sector framework           ...
Performance – Pictet - Japanese Equity Opportunities (JPY)     Annual Performance %                                       ...
BiographiesAdrian Hickey                                          Sam Perry                                            Ser...
BiographiesTakeshi Suzuki                                        Go ShiinaSenior Investment Analyst                       ...
For more information, please contact                                                                                      ...
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  1. 1. Japanese EquitiesJanuary 2013
  2. 2. Japan is cheap versus history…Despite the ‘Abe-nomics’ Dividend Yield / Price-to-Bookrally, the market remains 3.5% 3.0cheap… 3.0% 2.5 2.5% 2.0 2.0% 1.5 1.5% 1.0 1.0% 0.5 0.5% 0% 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TOPIX Dividend Yield TOPIX Price to BookSource: BloombergPictet Asset Management Japanese Equities 1
  3. 3. … and other markets…… although the rally has Dividend Yield(just) closed the yield 4.0%advantage over the US 3.5%market. 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TOPIX Dividend Yield S&P 500 Dividend YieldSource: BloombergPictet Asset Management Japanese Equities 2
  4. 4. …and has underperformed other major marketsJapan has been de-rated Japan Relative Performancewhilst going through a 140deleveraging process and 130dealing with a strong yen. 120More recently, Japan has hadto deal with the Tohoku 110earthquake and Thai floods. 100The effect of the market’s 90recent rally has been slightlymuted for the international 80investor by the weakening ofthe Yen. 70 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 MSCI Japan ($) relative to MSCI Kokusai ($)Source: BloombergPictet Asset Management Japanese Equities 3
  5. 5. … although Spain may be cheaper … CAPE ratios – deviation from historical average 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% -80% US UK il ia ia ina n ain o e y y ly rea ia an rke xic nc az pa Ita Ind es ss Ch Sp Ko rm Br Fra Ja Me Tu on Ru Ge Ind CAPE deviation from historical average* Source: Haver Analytics, Datastream, GSAM * Length of series varies: most DMs 30+ years, others 15 years.Pictet Asset Management Japanese Equities 4
  6. 6. We are positive on Japanese EquitiesNothing new – Japan’s been • Valuations are extremely lowcheap for a while… • Japan still has world-leading technology… but a lot of the old saws • The domestic economy is resilientabout the Japanese economyare no longer true… • No credit given for restructuring efforts… and the corporate sector is • The banking system is healthyvery different to 2002 – whenit was trading above current • The corporate sector is becoming boldervaluationsPictet Asset Management Japanese Equities 5
  7. 7. Companies have cut costs aggressively… Breakeven Ratio (companies with capital >¥1bn) 95 90 85 1Q 12 80 75 75.6 70 71.1 *Breakeven ratio = [fixed costs/{(1-variable costs)×sales}]×100 65 CY7576 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12Source: Mitsubishi UFJ Morgan StanleyPictet Asset Management Japanese Equities 6
  8. 8. …improved free cash flow dramatically… Free Cash Flow and FCF Yield (all industries, 4 quarters mav) (¥trn) (%) 20 8 15 6 10 4 5 2 0 0 -5 -2 -10 -4 80 85 90 95 00 05 10 FCF (lhs) FCF yield (rhs)Source: UBSPictet Asset Management Japanese Equities 7
  9. 9. …rebuilt their balance sheets… Net liquid assets of all Japanese corporations (¥ tn) 250 200 150 100 50 0 1980 1985 1990 1995 2000 2005 2010 Net liquid assets of corporate Japan (Yen tn)Source: Ministry of FinancePictet Asset Management Japanese Equities 8
  10. 10. …and invested overseas… Japanese automaker production volume in Japan and overseas (mn cars) 30 25 Overseas production Domestic production 20 15 10 5 0 (FY) 60 65 70 75 80 85 90 95 00 05 10 15Source: Mitsubishi UFJ Morgan StanleyPictet Asset Management Japanese Equities 9
  11. 11. …where returns are higherJapan is doing much more RP margin for domestic corporations and overseas subsidiaries/affiliatesthan just moving factories to (%)China. 5.5 5.0Over the last two years, 4.5 <Recurring profit margin>Japanese companies have 4.0represented more than 10% 3.5 Domestic Overseas corporation corporationof all cross-border M&A 3.0(by value). 2.5 2.0Japanese companies are 1.5second only to the Americans 1.0in making cross-border deals. 0.5 0.0 88 90 92 94 96 98 00 02 04 06 08 10 (FY)Source: Mitsubishi UFJ Morgan Stanley, Ministry of EconomyPictet Asset Management Japanese Equities 10
  12. 12. The export mix has changed dramaticallyEmerging markets are now Export values by destinationthe key driver of exports 8 (JPY trn, sa) 7 6 5 4 3 2 1 90 92 94 96 98 00 02 04 06 08 10 12 To developed countries To EM countriesSource: DB Global Markets Research, Ministry of FinancePictet Asset Management Japanese Equities 11
  13. 13. Japan is highly competitive Unit Labour Costs (rebased 100 in 2000, FX adjusted) Employee cost (US$ PPP adjusted)210 70,000 65,000190 60,000170 55,000 50,000150 45,000 Insert here your graphs130 and tables 40,000110 35,000 30,00090 25,00070 20,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Japan Germany Korea UK USA Italy Spain Japan Germany Korea UK USA Italy Spain Source: OECD Pictet Asset Management Japanese Equities 12
  14. 14. Japan still has its Global Leaders Autos and autoparts Nissan, Toyota, Denso Smartphone/ipad supply chain Murata, Sumitomo Bakelite Factory Automation Fanuc, Mitsubishi Electric, SMC Digital SLR cameras Canon, Nikon LNG Plant Engineering JGC, Modec Energy efficiency Hoshizaki Electric, Nippon CeramicPictet Asset Management Japanese Equities 13
  15. 15. It’s not just an export storyProfit margins have improved Non-manufacturing profit marginssharply in non-manufacturingsectors 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 Current Profit Margin of Non-Manufacturing Sector (ex-electric utilities)Source: BNP Paribas, Ministry of FinancePictet Asset Management Japanese Equities 14
  16. 16. The domestic economy is relatively robustThe recovery from the SME Confidence indices in Japan and USearthquake and Thai floods 120has been impressive 110This is before the impact of 100reconstruction really takeshold 90 80 70 60 50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Shoko Chukin Small Business Confidence Index NFIB Small Business Optimism IndexSource: BloombergPictet Asset Management Japanese Equities 15
  17. 17. Deflationary pressures are easing… Inflation (National CPI x fresh food and energy, YoY%) Wage growth (scheduled cash earnings, YoY%) 0.4% 1.5% 0.2% 1.0% 0.0% -0.2% 0.5% -0.4% 0.0% -0.6% -0.8% -0.5% -1.0% -1.2% -1.0% -1.4% -1.5% -1.6% -1.8% -2.0% 00 01 02 03 04 05 06 07 08 09 10 11 12 00 01 02 03 04 05 06 07 08 09 10 11 12 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20Source: Ministry of Internal Affairs and Communications, Ministry of Health, Labour and WelfarePictet Asset Management Japanese Equities 16
  18. 18. …with the BoJ playing its part…The Bank of Japan has been Bank of Japan holdings of JGBscriticized for not expandingits balance sheet sufficiently. 120 Fcast ¥trn 100The expansion post-Lehmansis dwarfed by the actions of 80the ECB and the Fed, but thisforgets past history. 60Japan had already had its 40banking crisis in the 90s andby 2000, the BoJ’s balance 20sheet was already 25% ofGDP. As of end-Q3, it was 032%, nearly double the Fed. Jan-04 Jul-05 Jan-07 Jul-08 Jan-10 Jul-11 Jan-13The ECB is at 45%. Regular JGB holdings JGBs held under new asset purchase programme Banknotes in circulationPressure from PM Abe mayproduce further action at the Source: MUMSS, from MOF dataBoJ meeting of 21st Jan.Pictet Asset Management Japanese Equities 17
  19. 19. … and animal spirits are returning? Tankan: Lending attitude of banks for mid-cap enterprises Tankan: Financial position of mid-cap enterprises 30 15 25 10 20 15 5 10 5 0 0 -5 -5 -10 -10 -15 -15 -20 -25 -20 1996 1998 2000 2002 2004 2006 2008 2010 2012 1996 1998 2000 2002 2004 2006 2008 2010 2012Source: Ministry of FinancePictet Asset Management Japanese Equities 18
  20. 20. M&A boom in JapanJapan’s companies developed Cross border transactions by Japanese companies ($bn)an appetite for acquisition in 602012. 50There was a rise in M&Aactivity in 2007 but a bunker 40mentality took hold in 2009.The strong Yen, access to 30foreign markets were allcontributing factors, but so 20too was a rise in animalspirits. 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BloombergPictet Asset Management Japanese Equities 19
  21. 21. Dangerous debt position? Gross Government Debt as % GDP Net Government Debt as % GDP 140 200 120 100 150 80 100 60 40 50 20 0 0 Po ai n US Ge UK n Po ai n US Ge UK n ia Au e ia Fr a y Fra y Au e Gr d Ire l Gr d Ire l ce ce ly ly ga ga nc an nc an pa lan pa lan Ita str Ita str ee ee Sp Sp rtu rtu rm rm Ja Ja Source: OECDPictet Asset Management Japanese Equities 20
  22. 22. Debt servicing costs are lowInterest payments remain at a Interest Payments as % GDPvery low level compared toGDP. 7This is thanks in part to 6Japan’s closed capitalaccount and in part to 5persistent deflation. 4The MoF is thus caught on 3the horns of a dilemma – withgrowth comes inflation. 2 1 0 ain US UK n ia e y l d ce ly ga nc an pa lan Ita str ee Sp rtu Fra rm Ja Ire Gr Au Ge Po Source: OECDPictet Asset Management Japanese Equities 21
  23. 23. What funding crisis? Net foreign assets vs foreign holdings of government debtJapan is the world’s biggestinternational creditor, nearly60% of GDP.Only 8% of its public debt isowned by foreigners. Source: IMF, Credit SuissePictet Asset Management Japanese Equities 22
  24. 24. What funding crisis? • All the ratings agencies have downgraded Japan over the last couple of years • This looks like they are playing to the crowd… • While the size of the gross debt is high (225% GDP), the net debt is only about 121% (IMF estimate) • Almost all debt is held locally – only 8% is held by foreigners • The private sector has an enormous amount of cash – The corporate sector has a cash pile equivalent to 30% of GDP – The household sector holds net savings of about another 4% of GDP • Japan is the world’s largest net creditor (57% of GDP) • If the Yen fell to ¥120, then net foreign assets would rise to nearly 90% GDP • This would enable Japan to retire a significant part of the debt pile.Pictet Asset Management Japanese Equities 23
  25. 25. Politics – lots of leaders, no leadership… USA Japan Source: Andrew Sullivan at theAtlantic.com, Pictet, WikipediaPictet Asset Management Japanese Equities 24
  26. 26. Demography – everyone else is on the demographic cliffOne of the many headwinds Elderly support ratio – number of working age (20-64) per person of pension age (65+)that Japan has had is the 16aging of the population. Projection Asia 14What is less well known isthat while Japan has fallen 12off the cliff, everyone else isteetering on the edge. 10 8Japan’s demography iscomparatively stable over the 6next several decades. 4Demography is everyone Western OECD countrieselse’s problem. 2 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Japan Korea China OECD USA Germany ItalySource: OECDPictet Asset Management Japanese Equities 25
  27. 27. Investors in general still sceptical • Perception that Japanese companies no longer competitive – But Sony and Sharp do not represent the whole picture • Concerns over corporate governance – Again, Olympus is not typical of corporate Japan – Recent track record no worse than other regions • Concerns over government debt and demographics – Other countries facing similar issues: views on Japan being re-assessed – Accept that domestic growth is limited but this does not mean equities should be written off – Understandable concern over currency risk: Sterling and Euro investors have a hedged share classPictet Asset Management Japanese Equities 26
  28. 28. Large parts of the market are being totally overlookedPercentage of companies with Stock coverage: Number of analysts S&P 1500 vs. Topix (1672 companies)2 or fewer analysts: US 2% 175versus Japan 58% over 25 3 170 21 to 25 30 237 16 to 20 107 308 11 to 15 117 407 6 to 10 202 172 3 to 5 244 17 2 151 14 1 291 0 0 527 USA JapanSource: BloombergPictet Asset Management Japanese Equities 27
  29. 29. Potential catalysts • Recovery in domestic demand – post-earthquake reconstruction to come • An end to yen appreciation – the BoJ is playing its part, further pressure from Abe? • An end to deflation – implications for asset allocation • A turn in the global cycle – policy shift in ChinaPictet Asset Management Japanese Equities 28
  30. 30. Pictet core Japanese equity fundsWe manage our funds with a strong bottom-up approach within a sector framework Japanese Equity Opportunities Japanese Equity Selection Sectors: +10% active betConstruction guidelines Long: +4%, Short: -3% Stocks: +4%Ex-ante tracking error 3 – 8% 3 – 7%Alpha target 4% + 3% +Benchmark Topix MSCI JapanFocused portfolio c.100 holdings: 80 long, 20 short 50 – 60 holdingsCash Net exposure maintained close to 100% Remain close to 100% investedExposure Full market cap spectrum No “micro” capsThe performance target, risk figures and exposures given above provide an indication of the probable characteristics in normal market conditions and are not intended to be legally binding outside of theInvestment Management AgreementPictet Asset Management Japanese Equities 29
  31. 31. Performance – Pictet - Japanese Equity Opportunities (JPY) Annual Performance % Cumulative Performance % 20 20 0 0 0.00 - 20 0.00 - 20 0.00 - 40 0.00 - 40 -1.33 - 60 -1.45 - 60 6.65 2007 (Aug) 2008 2009 2010 2011 2012 (Nov) 4.28 3.58 Pictet- Japanese Equity Opportunities Topix3.96 (TRI) Performance Portfolio Benchmark Difference Risk Figures Portfolio Benchmark (annualised per 30.11.12) (annualised 5 years per 30.11.12) YTD 13.69% 9.73% 3.96% Standard Deviation 23.00% 21.70% Since Inception (31.07.07) -9.49% -11.81% 2.33% Tracking Error 3.58% 1 Year 14.05% 9.87% 4.18% Information Ratio 0.80 3 Years 3.81% -0.23% 4.04% 5 Years -8.15% -10.75% 2.60% Gross Performance in JPY Portfolio: Pictet- Japanese Equity Opportunities Benchmark: Topix (TRI) Reported in JPYSource: Pictet/Performa GlobalPictet Asset Management Japanese Equities 30
  32. 32. BiographiesAdrian Hickey Sam Perry Serena RobinsonHead of Japanese Equities Senior Investment Manager Senior Investment ManagerDeveloped Equities team Developed Equities team Developed Equities teamAdrian Hickey joined Pictet Asset Management in Sam Perry joined Pictet Asset Management in Serena Robinson joined Pictet Asset Management2006 and is Head of the Japanese Equities Team. 1997 and is a Senior Investment Manager in 2000. She is a Senior Investment ManagerAdrian has concentrated on Japanese equity fund specialising in Japanese equities. specialising in Japanese equitiesmanagement since joining Scottish Equitable in Sam graduated from the University of Oxford with She began her finance career at INVESCO inEdinburgh in 1991. After Scottish Equitable he a first class degree in Philosophy and Psychology. 1999.spent four years working as a buy-side analyst in He later gained a Doctorate in Experimental Serena graduated from Trinity College Dublin withTokyo with Commerz International Capital Cognitive Psychology, also at Oxford University. a BA in Economics & Business Studies and has aManagement. On returning to the UK, Adrian He is also a Chartered Financial Analyst (CFA) First Class Master’s degree in Business Studiesworked for Edinburgh Fund Managers and Shell charter holder. from University College Dublin. She is a CharteredPensions. Adrians most recent position before Financial Analyst (CFA) charter holder.joining Pictet was Director of Japanese Equities atForeign & Colonial in London.Adrian graduated with a BA (Hons) in Economicsand Economic History from the University ofBirmingham and holds an MA in Philosophy fromLancaster University.Pictet Asset Management Japanese Equities 31
  33. 33. BiographiesTakeshi Suzuki Go ShiinaSenior Investment Analyst Senior Investment AnalystPictet Asset Management (Japan) Pictet Asset Management (Japan)Takeshi Suzuki joined Pictet Asset Management Go Shiina joined Pictet Asset Management (Japan)(Japan) Ltd. as a Senior Investment Analyst in Ltd. in 2009, as a Senior Investment Analyst with2001 with a focus on technology sectors a focus on industrial sectorsHe began his investment career in 1987, joining Before joining Pictet, he spent ten years atOkasan Securities as an institutional salesman, Goldman Sachs Asset Management and began hislater becoming an analyst in the research career in 1997 as an analyst at Dai-Ichi Kangyodepartment. Bank.Takeshi graduated from Rikkyo University with a Go graduated with a BA in Economics and FinanceBA in Economics. He is a Chartered Financial from the University of Tokyo. He is also aAnalyst (CFA) charter holder and a Chartered Chartered Member of the Security AnalystsMember of the Security Analysts Association of Association of Japan.Japan (CMA).Pictet Asset Management Japanese Equities 32
  34. 34. For more information, please contact Pictet Asset Management SA Route des Acacias 60, 1211 Geneva 73 Pictet Asset Management Limited Authorised and regulated by the Financial Services Authority Moor House, Level 11 120 London Wall London EC2Y 5ETPictet Asset Management (“PAM”) definition: In this document, Pictet Asset Management includes all the operating subsidiaries and divisions of the Pictet group that carry out institutional asset management: Pictet AssetManagement SA, a Swiss corporation registered with the Swiss Financial Market Supervisory Authority FINMA, Pictet Asset Management Limited, a UK company authorised and regulated by the Financial Services Authority, andPictet Asset Management (Japan) Limited, a Japanese company regulated by the Financial Services Agency of Japan.This document is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where suchdistribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to theaccuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictetmanaged funds. This document has been issued in Switzerland by Pictet Asset Management SA and/or Pictet & Cie and in the rest of the world by Pictet Asset Management Limited and may not be reproduced or distributed,either in part or in full, without their prior authorisation.For UK investors, the Pictet and Pictet Total Return umbrellas are domiciled in Luxembourg and are recognised collective investment schemes under section 264 of the Financial Services and Markets Act 2000. Swiss Pictetfunds are only registered for distribution in Switzerland under the Swiss Fund Act, they are categorised in the United Kingdom as unregulated collective investment schemes. The Pictet group manages hedge funds, funds ofhedge funds and funds of private equity funds which are not registered for public distribution within the European Union and are categorised in the United Kingdom as unregulated collective investment schemes.For US investors, the Shares of the funds managed by the Pictet Group are being offered to United States tax-exempt investors Shares sold in the United States or to US Persons will only be sold in private placements toaccredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares ofthe Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any USPerson. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act. www.pictet.com

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