Following a traumatic year in Japan, ranging from the tragic earthquake to persistent yen appreciation, we enter 2012 convinced that the early part of the year will face similar problems. An unresolved Eurozone outlook accompanied by a severe European recession will continue to outweigh the positive signs of recent economic improvement in the US and a likely moderation in the Chinese slowdown and will translate into a limited risk appetite on behalf of investors. Global bonds appear expensive but still exhibit safe haven characteristics. The potential for a significant rethink for markets lies principally in the unlikely scenario whereby governments are able to finance growth as opposed to the current focus on austerity in order to trim budget deficits. Perhaps the ECB unleashes the dramatic QE but we sense this only occurs at a moment of maximum alarm and despair, which probably suggests that equity markets will be at much lower levels. Where does this leave the Japanese equity market?
Fortunately Japan has a few positive factors. The economy will respond to the significant post earthquake reconstruction spending that will offset the more sluggish manufacturing export conditions. Corporate balance sheets are awash with net cash and consequently remain well placed, especially given the yen levels, to accelerate their overseas acquisitions, a more noticeable trend from Q4 2011. Industry consolidation will accelerate as will the more aggressive restructuring at individual companies. Shareholder awareness will continue to maintain a level of pressure on corporate managements and hence share buybacks at many companies will occur for the first time although it would be premature to expect the Olympus debacle to change overall corporate thinking in the near term.
» Read more: Rupert Kimber – December 2011
November has been in many ways a re-run of September, with problems in the Eurozone dominating sentiment and news. It seems that market consensus is rapidly swinging to contemplating life after the Euro, and while it seems desirable for the periphery to devalue to improve competitiveness, and possibly now to also lower debt service costs (as their inability to print currency is now more of a hindrance than the umbilical cord to Germany’s interest rate structure has been a positive), the political will is not yet there. As and when it gets there, the mechanism for fragmentation of the Euro is, to say the least, unclear. The universe of politically feasible solutions does not intersect with those that are economically rational – in particular, avoiding the complete implosion of the banking system as currency blocs realign. That said, a lot of negativity over Europe is now priced, and elsewhere there has been slightly better news. Data out of the US has had a more positive tone to it (spending and employment) and more importantly we are seeing the Asian policy responses that we have been awaiting. Regional interest rate cuts and a move to ease SME funding in China have been followed by the first move to lower reserve requirements in China. This is an important change in policy direction and we hope this portends a rather more rational market over the next few months.
Mark Fleming – December 2011
January 4th, 2012 No comments »‘Asian markets down on concern over Europe’ is now a Bloomberg headline in danger of burning itself into one’s computer screen. In a year when the US markets are almost flat, Asia and Europe (the latter index crammed full of bankrupt banks) are level pegging, down circa 20%. It seems that Asian investors are interpreting all news as bad, as exemplified by the uniformly negative reaction to the (not that surprising) demise of the Dear Leader of North Korea. No one knows or can even usefully guess at what will happen, but the immediate reaction was to panic over a war breaking out. An equally or more likely outcome is some form of rapprochement and some degree of integration back into the world at large. Our base case is the status quo. Yet the default at the moment is to assume the worst, and with Asian markets suffering a double whammy of fund flows from both international capital and panic-struck retail investors (who are being influenced primarily by doom and gloom over Europe) and who still matter much more in markets such as Korea, Taiwan and China than in the institutionally intermediated Western markets, and who by their nature are high beta investors – all in or all out. Low market volumes exacerbate this effect. The good news is that it also works in reverse when sentiment stabilises. We do not need a ‘solution’ to European woes for this to happen. Indeed, anything other than a disorderly break-up of the Euro is probably enough to prevent disappointment from current expectations – and in that case Asian equity performance might be the least of ones worries. » Read more: Mark Fleming – December 2011
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