Supportive US economic data and a consequently weaker Yen, provided significant impetus to the Tokyo market as optimists continue to highlight the high operational leverage of Japanese manufacturing companies. As confidence in the equity market continued to improve, attention turned to low PBR stocks which were suddenly aggressively sought after, a pattern all too often repeated prior to a near term peak in the index. With expectations for markedly higher TO March 2011 corporate profit levels and crucially a market where international investors remain underweight, share prices can probably move higher in the event of further improved economic data. However as highlighted in previous months, momentum carries risk and we sense that expectations of a weaker yen, through the Y100 level, will be required in order to preserve the earnings growth story in the manufacturing sector beyond September 2010 given tougher hurdle rates on capacity utilisation and input costs. The BOJ remain an important variable in this debate and judging on past history, there is a risk that the improved domestic economic data breeds a certain complacency and therefore the more anaemic ongoing policy announcements fail to bring about the required further weakening of the yen.

For the stockmarket to make significant gains a sustainable recovery in the domestic economy is required, as opposed to the current green shoots that are visible. Longer term we remain constructive on the emerging industry consolidation but this will take longer to impact corporate profitability, especially in the retail sector. Material employment gains and a resumption of domestic loan growth will be required in order to provide certain domestic sectors with a new found investment catalyst. For now greenshoots are sufficient to encourage some buying activity in the market but this is half hearted at present. Against this background it is more relevant to remain highly stock specific and from a bottom up viewpoint, there still seem enough opportunities without having to make a strong market call.

Longer term the arguments will continue to rage on over future US growth rates and the potential frailty of the Eurozone but for now, with global central banks reluctant to extract liquidity too quickly, global equities will make further progress and that includes Japan. Within our portfolio we are recycling positions by selling certain holdings as they reach our target prices on the basis that the compelling value seen this time last year is now less apparent and any unexpected setback for equities would expose this pretty quickly. We continue to believe that sceptics on Japan have failed to appreciate the depths of the fixed cost reductions and restructuring. As visibility further improves on both counts, this may herald a further reduction in the Japan underweight and provide the last leg of the current rally.

• Previous Entry: Mark Fleming – March 2010
• Next Entry: John Payne & Steven Miller – March 2010