Japan: Stocks unlikely to move off their bottom until year-end at the earliest

- Severe deterioration in market sentiment points to bottom for share prices: "Sentiment on the Japanese equity market worsened markedly between August and early September, and many signs evident in previous phases where Japanese stocks fell to lows came to the fore again. The September QUICK survey of stocks indicated a severe deterioration in stances on both the portfolio weighting of Japanese equities and the economy/corporate earnings among equity managers at Japanese institutional investors."
- Recession unlikely: "We think the Japanese economy is highly unlikely to fall into recession between now and the end of 2011. The focus of market concerns about the global economy is on trends in the US economy once policy stimulus is withdrawn. However, in both Japan and the US, business managers have recently been reining in capital expenditure and employment as they take a cautious view of the economic outlook. In the past, both countries have tended to fall into recession following capex adjustment. With companies curbing capex, we see little possibility that either economy will enter a recession given the current absence of surplus capacity."
- Earnings estimate revision index likely to bottom in late 2010 or 2011 Q1: "Reflecting the building sense of economic slowdown of late, the earnings estimate revision index for Japanese companies has been falling. We think this index will need to bottom out before Japanese equities can form a major bottom from which to rally. We see late 2010 as the earliest timing for such a move, and think the most likely timing will be 2011 Q1. Critical to this are developments on the monetary and fiscal policy front, especially with the US economy expected to remain anemic through end-2010. Whether or not Bush era tax cuts will be allowed to expire as initially planned at end-2010 merits particular consideration. Another key issue is global inventory adjustments in the electronic parts and devices industry. Trends in this industry are closely watched as a leading economic indicator, as they often reflect marginal changes in the global economy. The industry's inventory/shipment balance has worsened recently, and looking at the past 10-year average cycle we think the balance will continue to deteriorate until around March or April next year."
- Investment strategy: "In view of the above, we project that Japanese equities will form a major bottom from which to rally from late 2010 onward. With share prices at or near lows, however, we do not recommend lowering portfolio beta values. To raise portfolio beta value, we continue to recommend trading companies and construction machinery manufacturers, and from this month we also include automakers. We believe trading companies and construction machinery manufacturers will benefit from an expected alleviation of concerns about Chinese economic slowdown. For automakers, we expect the market to react to excessively steep share price declines owing to negatives such as yen strength and the end to eco-car subsidies."

Nomura Japanese Equities Investment Strategy Sep2010

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