Japan: August 2010-Major rebound for equities globally, particularly in southern Europe

- S&P Global Equity Index up 5.8% in July — "Global equities rebounded sharply in July after the release of EU bank stress test results. As we had expected, the BCBS eased its draft regulations, which resulted in significant growth for bank stocks globally."
- Greek crisis calming — "Equities grew sharply in southern Europe and developing markets. Growth in southern Europe was led by Greece (+21.4% in July), Spain (+14.0%), Portugal (+4.1%), and Italy (+8.3%)."
- Japanese equities up just 1.0% in July — "However, on a dollar basis Japanese equities were relatively strong. The dollar-based S&P Japan Equity Index is up 1.6% YTD (but down 5.5% in yen terms). By comparison, the US Equity Index is up 0.8% and the Europe Equity Index is down 5.7% (dollar base for both)."
- Long-term yen appreciation risk — "The yen-dollar rate is firmly in the ¥80$-¥90/$ range. The yen has strengthened over the long term, from a July 1998 low of ¥147/$ to ¥85/$ in November 2009. Even if the yen falls into the ¥70/$-¥80/$ range, the government and/or BoJ may not intervene in the forex market."
- Asia-related stocks, domestic demand stocks likely to benefit from deregulation
— "China and other Asian economies are doing relatively well, so we recommend making China-related stocks (machinery, autos, trading firms, marine transport) the core of one's investment portfolio. We also expect to see deregulation in the tourism, real estate, and communications sectors, so domestic-demand stocks could be attractive as well."
- Beneficiaries — "We think beneficiaries of current trends include 1) Komatsu (machinery), a global infrastructure-related stock; 2) Unicharm (personal care), a core Asia-related stock; 3) Nidec (electronic machinery); Rakuten (consumer cyclical), a domestic demand-related stock with high growth potential; and ANA (transportation), which should benefit from moves to nurture the tourism industry."

Citigroup Japan Portfolio Strategist 20100802

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