There are a number of parallels between the Japanese experience in the 1990s and the situation Europe currently faces, said Russell Investments global equity portfolio manager, Phil Hoffman.
Japan’s so-called ‘lost decade’ during the 1990s (or, more accurately, Japan’s two lost decades) was the result of a banking crisis and a long period of deleveraging, said Mr Hoffman.
“The banks were trying to reduce assets, and they weren’t lending. They were just parking all their money in government bonds,” he said.
Demographics were also a problem in Japan (the population was ageing) just as they currently are in Europe, said Mr Hoffman.
“A lot of the companies didn’t see a reason to invest because the growth opportunity wasn’t there – there wasn’t the need to expand capacity,” he said.
Similarly to Japan in the 1990s, European banks are “massively over geared” and have gearing ratios that are far higher than in the United States, said Mr Hoffman.
“There’s still a lot of deleveraging to go – they’re basically selling off businesses and retrenching. And that will have an impact on the economy,” he said.
But despite the prospect of prolonged negative sentiment, there are still at least two good opportunities for investors, said Mr Hoffman.
One involves global exporting multinational companies that are based in Europe but do most of their business elsewhere, he said.
European companies that make their money by exporting products to middle-class consumers in emerging markets like China may be undervalued, said Mr Hoffman.
Secondly, more domestically-focused companies in Europe may find their share prices so “beaten down” due to weak local economies that they become “great opportunities”, he said.
“No matter how bad things appear, there’s still investment potential there because investors will tend to overreact and things will get too depressed,” said Mr Hoffman.
