A cautious approach to the month proved correct but the rapid decline in equity markets resulted in there being almost no places to hide. Our more defensive positions and small/medium cap stocks were treated as harshly as the more overvalued cyclical ones. Equity markets continue to struggle with the issue of global growth where concerns about a deceleration in China now accompany the more obvious European issues and the potential for a spillover to the US. One or two slightly disappointing pieces of US economic data have frightened investors and in such an uncertain environment conditions in equity markets will remain highly volatile as authorities and central banks struggle to retain the correct fiscal and monetary policies. There is no doubt that the European governments and the ECB could have handled the situation significantly better and we sense that at least the worst of the uncertainty triggered by their public comments is now behind us.

The outlook for Japan is positive in the sense that investment opportunities remain abundant with very cheap valuations, albeit that these opportunities lie outside of the mainstream. The weak euro has and will continue to encourage global investors to reevaluate holdings in manufacturing companies and there is evidence of money switching into Europe. Proponents of a markedly weaker yen look likely to be disappointed. The bigger issue remains valuations which on the surface appear enticing.

However, since our March visit to Japan we have been uncomfortable with the notion that cyclical earnings would continue to improve after a strong first half of the fiscal year i.e. ending in September, and this remains our stance. Hence valuations appear misleading. A recent broker research note extolling the virtues of Japanese steel companies but ending with forecasts of no profits growth to the end of fiscal 2012 illustrates the point.

We remain very upbeat about the upside for our holdings with secular as opposed to cyclical growth stocks now trading at valuation levels not seen for a longtime. Further significant restructuring opportunities are continuing to emerge with our target prices suggesting c 80% upside. The revaluation of leased property assets, another theme within our stock selection, has significantly widened the price to book discounts but this has been largely ignored in the past few weeks. Within the larger company holdings, we are surprised that the decision by NTT to retire 16% of their treasury stock has not been rewarded by the market and hence valuations look very attractive. As regards the broader cyclical arena, we are reserving judgment until our August visit and see no reason to take a chance of the earnings component of the PE. The market appears oversold at present but we are firmly of the view that stockpicking remains the critical factor for now and will leave the beta game to others.

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