European sovereign debt issues, emerging signs of tighter monetary policy in China and mixed US economic data conspired to leave global equity markets under pressure as questions over the durability of the global economy resurfaced. Japan suffered also as the yen regained some momentum as risk appetite receded. Japanese equity prices were further undermined by the fact that earlier in the year foreign investors had been significant buyers but this trend was halted and hence the only natural buyer of equities moved to the sidelines. However economic data continued to suggest the first signs of some recovery in the domestic economy and this was reflected within the stockmarket as buying interest was redirected towards the domestic areas as opposed to the global cyclicals and manufacturing stocks which had been so evident especially in early January.

From a micro perspective the most heartening aspect was confirmation that the ongoing restructuring combined with the economic recovery globally had allowed many Japanese manufacturers to swing significantly back into profitability. This is critical for the market as our analysis continues to reveal that the depth of this restructuring is deeper than the more cynical commentators are prepared to concede. The important point here is that we are talking not simply about fixed cost reductions but also strategic cost cutting involving the withdrawal from non-core businesses but in some cases core businesses that are unable to generate a sufficient return on capital. As regards the domestic economic recovery we find evidence to suggest that liquidity is shortly to return to areas such as real estate whilst the banks, having in the main achieved their capital raising efforts, are now likely to become more functional in the next financial year as balance sheet issues subside. This will take the form of reducing assets of highly indebted borrowers and offering on properties to the undergeared major developers on prices that should favour the buyers. By extension it may then lead to a slight recovery in lending volumes for the real estate industry although we are not making the case for any imminent underlying price recovery near term especially in commercial property.

The only significant issue that concerns us in the domestic economy relates to the likely changes towards the consumer finance that are scheduled for implementation from July onwards. These new regulations will seriously limit the ability of individuals to borrow short-term funds and for many this absence of funding will be a serious problem. One cannot rule out the possibility of further severe delinquencies and possible excess interest claims for the card cashing companies. The problem here is that the lack of a nationwide credit checking system prevents any accurate analysis of the scale of any problem. More encouragingly, the labour market continues to show minor improvements with signs that manufacturers are tentatively rehiring contract workers that were dismissed in mid 2009 following the collapse in capacity utilization rates and even certain large GMS retailers are starting to see a stabilization in customer traffic numbers.

The conclusion therefore is that domestic economic conditions have bottomed and with emerging signs of a gentle recovery the stockmarket should be supported unless overseas conditions deteriorate suddenly. The expression of better to travel than arrive is an apt description of the current situation.

• Previous Entry: Jeff Coggshall – February 2010
• Next Entry: John Payne & Steven Miller – February 2010