Japan remains an investment conundrum. At the corporate level there is much to admire: healthy balance sheets improved by rising cashflow, ongoing commitment to restructuring especially in the more domestic sectors where historic overcapacity has affected returns and valuations that appear inexpensive. Ostensibly an attractive cocktail but why then are investors apparently so unenamored? Perhaps the reality is that the ongoing domestic institutional selling, leaving the foreigner as the only buyer, continues to expose the market to more cyclical factors, namely world growth rates and on this score there is cause for concern that corporate profit margins have peaked.

Our primary concern for several months has surrounded earnings forecasts, especially for next year when clearly the benefits of inventory restocking will be removed resulting in a lower base effect and therefore requiring strong sales to post a positive sales number. Analysts have remained very optimistic and have retained target prices that now look attractive given the recent market decline but this still appears overly ambitious as » Read more: Rupert Kimber – June 2010

June saw significant volatility during the month with slower growth anticipated for China acting as the main catalyst to drive resource equities much lower mid-month. The CBOE SPX Volatility Index or VIX ranged from 24% mid-month to 35% at the start of June and also by month end. Correlations between asset classes remain high by historic standards and implied volatilities continue to trade at a premium to actual.

One measure of economic activity, the Baltic Freight Index, is down 40% over the past month. Despite a huge injection of both fiscal and monetary stimulus, Europe looks moribund and US growth appears to be slowing. First quarter US GDP growth was revised down from 3.2% to 2.7%. In addition, two-year Treasury yields stand at a record low yield of 0.6%, which was not even seen during the depression and the 10-year yield has fallen below 3%. These low Treasury yields are clearly incompatible with most economists’ estimates of 3% annualised growth for the next few years. In Europe, the financial system remains under duress across Europe and according to the Bank of England’s June Financial Stability Report, banks in Europe and the US need to re-finance/roll-over $5 trillion in debt by » Read more: John Payne & Steven Miller – June 2010

Investors cannot stop worrying about debt. And this is the case no matter whether it is Southern European sovereign debt, Fannie and Freddie’s US mortgage obligations, or the upcoming aftermath of China’s lending binge last year. I can’t tell you for sure exactly how many, or which potential parts of this moving jigsaw puzzle are factored into expectations – and neither can anyone else. But there are a few interesting things to point out.

Remarkably, a Greek default and significant further weakness amounting to an effective “double dip” are now already factored into many managers’ “base case” scenarios. For instance, in recent surveys no less than 80% of fund managers expect a Greek default or restructuring some time in the next couple years, as well as bank recapitalizations in Spain, and serious problems in most of the rest of Europe. Investors have firmly embraced the notion that if we are having a recovery, it sure isn’t a normal one.

Asian markets have sold off (partially as “growth proxies”) and China continues to face » Read more: Jeff Coggshall – June 2010

The electorates of Europe are just starting to realise the reality of the coming austerity measures. Conjecture about cuts amounting to billions of $, £ or € and tax increases are now becoming a reality. Significant reductions in policing and schools are happening, pay cuts to fund (reduced) pensions and tax rises that make a difference to everybody are now coming home to roost. The private sector is also starting to realise how big a client government is – and how generous it has been in the past in its behaviour as a customer. It seems almost inconceivable to us that this does not precipitate the much-feared double dip recession.

So are European Governments tightening too early as the US has been saying? The answer is a resounding no. There is never a ‘good’ time to go cold turkey – in this case on debt – but the longer you leave it, the worse it is. The politician’s favourite fable of a vigorous recovery that leaves economies in a position in a year or two to take a major fiscal tightening on the chin and not go down is wishful thinking of the worst kind. It merely adds more debt in the interim and if there has been any kind of recovery in that period, dilutes the political will to make the difficult choices that have to be made. While the Germans are donning a hair shirt with possibly too much relish, » Read more: Mark Fleming – June 2010