Renewed interest in Japanese equities continued as expectations for a weaker currency encouraged foreign investors to narrow significant underweight positions. Of some concern is the extent and speed with which such a consensus has emerged. Although we expect the BOJ to turn more accommodative over the course of the year, near term expectations have run ahead of reality whilst we continue to argue that the BOJ needs to be more concerned with formulating a plan, in conjunction with the government, to remedy the domestic economy on a longer term time horizon. Short term remedies from a weak yen and a global cyclical recovery have proved hopelessly ineffective over the last 20 years. Clearly the Chinese rate decision, the proposed Volcker plan and further turmoil in Euroland, markets continue to exhibit a fragile underbelly and in the absence of domestic policy developments, Japan appears likely to follow other world markets. Some optimists point to the likely strong forthcoming earnings season but there seems a major risk in extrapolating historic data for future share prices. The bigger issue facing markets globally is the direction and magnitude of economic growth especially in H2 2010 and we expect ongoing conflicting data in the coming months to subdue risk appetite.

From an investment perspective we are less concerned especially as many domestic companies, especially in the small/mid cap arena, continue to look very attractive. It goes without saying that the absence of liquidity and minimal investor interest are normally the classic hallmarks of a bottoming out in share prices. Surely we are not expecting any sudden economic recovery rather a gradual recovery but that should prove sufficient for earnings. Recent macro economic data is currently supportive to this view. Valuations look very attractive and we are adding to positions in this area as from an absolute perspective, the downside appears limited. Longer term we still see the ongoing industry consolidation and capacity reductions as supportive to corporate earnings and are therefore somewhat perversely hoping that the Yen stays around current levels in order to maintain pressure on corporate managements.

Early indications from the corporate results season have been predictably positive given the sharp recovery in global growth in the fourth quarter of 2009. Of greater significance however, is the outlook as many companies will face tougher comparatives from April onwards. Less favourable sales growth levels underline the importance for many corporate managers to continue their restructuring efforts and at this stage we have little reason to worry that further such efforts will not be forthcoming. We do remain concerned that with consumption levels globally only showing marginal improvement given high unemployment levels, many countries and governments are overly reliant on improving exports as a means of engineering economic growth which in some quarters raises the fear of increasingly protectionist policies.

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