Thursday, January 10, 2013

Contrary Views On the Japanese Market

Yesterday's post asked the question:  Is is time to buy Japanese stocks? 

The tone of my piece was skewed towards the bullish side, as I am always intrigued by areas that seem out-of-consensus.

But I must confess, as I studied the idea more yesterday, I am now starting to feel like maybe more patience is called for before buying stocks in the Nikkei.

For example, chief investment strategist Tim Hayes of Ned Davis Research Group ranks Japan near the bottom of the world's equity markets in terms of attractiveness, and would strongly underweight Japan in any global portfolio allocation.  Here's what he recently wrote:

As for the Japanese market, the equity performance has yet to indicate a meaningful change in economic expectations, valuations are unattractive, and investors remain discouraged by weak earnings growth and profit margins.  Entering 2013 we are maintaining our strong underweight allocation to Japan, while continuing to overweight emerging markets and Pacific ex. Japan, a region that's also relatively attractive on a valuation basis.

Then there's this article that appeared on the CNBC website.  The piece cites a number of Japanese analysts that note that the Nikkei has rallied in anticipation of new Prime Minister Abe's proposed expansionary fiscal and monetary policies.

However, it is not yet clear that the actual implementation of the policies will prove successful:

Geoff Lewis, global market strategist at JPMorgan Asset Management in Hong Kong agrees on the need for caution, saying the firm has a neutral position on Japanese shares.

"Japanese shares have rallied quite a lot, with markets anticipating a big change in policy, but a lot now rides on implementation.Short-term, this is not a rally you really want to chase," he said.

"It's pretty hard to predict what the outcome will be. The first Abe regime was pretty disappointing and did not achieve much and if you look at the amount of stimulus that the Japanese economy might hope to get from a 10-15 percent fall in the yen, it's not that much," Lewis said referring to expectations for a weak yen to boost economic growth between 0.25 percent and 0.5 percent in the fiscal year starting April 1.

Finally, here's David Keohane of FT Alphaville echoing the same themes as the CNBC article; namely, the track record of PM Abe during his first term in office was something less than stellar, and it is not clear that this time will be any different.

Keohane quotes extensively from a report published by Standard & Poor's but here is an excerpt (I added the emphasis):

The biggest cause for skepticism is simply the scale of the policy moves that would likely be required. The BOJ should be able to use monetary policy to bring an early end to deflation. But the BOJ failed to do so in the past and therefore has a serious credibility deficit when it comes to fighting deflation. And having gone on for so long, deflation expectations have become “hard-wired” into the economy and in the mindsets of economic agents. So the scale of the policy action (QE) required to change the equilibrium behavior of the economy and dislodge deflation expectations would likely be dramatic and literally “off the charts.” For a society and political culture that favors consensus and incrementalism, and for an institution as inherently conservative as the BOJ (at the best of times central banks tend to be conservative institutions), the required actions may just not fall within the set of practically feasible options. 

 So perhaps caution is warranted at this time.