Wednesday, May 25, 2011

Goldman Sachs: "Japan equities set to rally back to pre-crisis highs"

Kathy Matsui of Goldman Sachs wrote a bullish piece on the Japanese stock market in yesterday's Financial Times.

Japan, of course, is currently mired in attempting to recover from the disastrous aftereffects of the earthquake and tsuanmi. First quarter GDP was -3%. Electricity remains in short supply, and many businesses have cut back production. The response of the government has been widely criticized, and Prime Minister Kan has been scrambling to contain the political damage.

And yet, as Ms. Matui writes:

Compared to the 1995 Kobe earthquake, when price to earnings multiples traded at 77 times, the full year p/e {for the Topix} stands at a more globally comparable 13 times.

For reconstruction, the government has approved a $50bn supplementary budget, and a second budget totalling $125bn is expected this summer. Since the earthquake, the Bank of Japan has conducted sizeable fund supply operations and expanded its asset purchase scheme by 14 per cent to $500bn. The BoJ has stated that, if necessary, it will take further steps to ease policy. / Markets / Insight - Japan equities set to rally back to pre-crisis highs

The Nikkei is currently trading at a lower multiple, and offers a higher dividend yield, than the S&P 500, and yet the Japanese stock market has lagged most of the global stock markets.

I'm not totally convinced that this is the time to jump into the Japanese stock market - even the bullish Ms. Matsui doesn't think that the Nikkei will start to move until the fall - but I like the concept.

Japan is full of world-class companies, and its famous work ethic remains intact despite 20 years of economic malaise. With the government poised to throw massive resorts into rebuilding, I am confident that Japan will begin to show signs of recovery by this fall.

The question is: When do you start buying Japan?