When we look at the 2011 performance for the main world equity indices, we can clearly see that the blue chip Japanese index, the Nikkei 225, underperformed the others by quite a margin. While the S&P made a late year rebound to close essentiallt flat, the Nikkei ended the year with a retreat of almost 15%. Only the German Dax performed almost equally bad.
I’m sure many readers will agree that last year was not the best of the years for developed world stock markets and Japan in particular will not look back fondly what with a major earthquake and catastrophic tsunami that put the country at risk of a nuclear disaster. During this period, the stock market was severely hit with the Nikkei losing 6% on March 14 and 10% the following day. The country entered a difficult period and many economists predicted GDP to drop 2%, 3%, and some even more. Luckily for the Japanese, they were able to do much better and closed the year with a drop of 0.6% in GDP, according to the IMF.
In 2012, the Nikkei posted a 19% gain during the first quarter, outperforming its peers by a wide margin but it started losing steam during the second quarter as fears over the direction of the Chinese economy came to the surface. At this point,the Nikkei has now lagged the Dax and S&P with the Nikkei up 6.2% YTD, the Dax up 18.1% and the S&P 11.6% YTD. Regular readers will know that this magazine believes the Nikkei is now at a generational trough and is a cracking buying opportunity. We have a Conviction Buy call out on the index at the 8600 level.
Relative performance chart (yellow – Dax, green – FTSE, red – S&P, black – Nikkei)
Efforts by the Japanese government to kick start the economy gained some traction last year but, government spending may be approaching an end now. Domestic demand has been boosted by a mixture of monetary easing and government spending but concerns on the sustainability of the latter are now mounting. Cuts need to be made. In fact, the Japanese Government is the most indebted in the world although the vast majority of this debt burden is financed domestically – in stark contrast to the situation with many of the European sovereigns.
The Japanese economy is predicted to grow 2.4% this year according to the IMF, with a decrease in the rate of expansion to 1.5% next year.
The latest Markit PMI data for Japan revealed two consecutive monthly declines in manufacturing with the latest July number being the lowest in fifteen months. The situation in Europe however isn’t any better nor indeed in the US as their economy continues to struggle to create jobs and grow at the desired pace, seemingly no matter what efforts the FED continues to apply – injecting “free money” into the economy. Japan is one of the leading economies with relatively low exposure to Europe only 13% of its exports go to this part of the world.
We continue to believe that the relative performance of the Japanese market versus other major indices is unjustified. The mixture of solid fundamental underpinnings – price:cash, price:book, PE relative to its historic norm and, the encouraging technical signals in recent weeks, keep us resolutely long this market and willing and eager buyers on any dips.
Filipe R Costa & Editor