Headwinds Blowing: Focus on Stable Growth/China

- Guidance not so conservative after all? "Given our economists’ recent downward revisions to their US and Japanese GDP forecasts as well as their outlook for persistent yen strength, we now anticipate a more muted earnings recovery and company guidance may not be overly conservative after all. Based on our revised JPY/US$ assumptions of ¥85 in FY3/11 and ¥90 in FY3/12, we now forecast TSE1 EPS of ¥43.4 in FY3/11 and ¥48.5 in FY3/12, representing 62% and 12% yoy growth, respectively, (versus our previous estimates of 73% and 20%)."
- Headwinds suggest more limited market upside "Using our revised earnings estimates, we now believe the market’s upside is more limited and our new TOPIX targets are: 850, 870, and 920 for the next 3-, 6-, and 12-months, respectively (from 900, 950, and 1,020 previously). The key positive risks to our outlook are a stronger US economy and a weaker yen."
- Highlight stable growth and China-exposed stocks "Against a backdrop of weaker US/Japanese growth, firm Chinese growth and a strong yen, we suggest focusing on our new basket of stable growth companies (i.e. GSSZSTGR) and China-exposed stocks (i.e. GSSZJPCN or GSSZCIND). Reflecting our more cautious near-term market outlook, we are raising our defensive exposure at the expense of cyclicals in our recommended sector weightings."

GoldmanSachs Japan Portfolio Strategy 20100811

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