Money on the move again - BUT where is Japan heading?

2009 was quite frustrating for me - the equity index levels at the bottom of the last trough were clearly underpriced and sentiment driven (as were YTMs on High Yield and EM bonds) - recession woes had a firm grip and of course liquidity was even more scarce then; than salt is now to clear my driveway from ice..! And so my pension transfer arrived late (October) and I missed the party.. Asia and EM Mkts were up and even the footsie has made easy double-digit returns.. doh! I consoled myself with some small gains in metals which I posted a few weeks back.

In terms of growth since March 2009 then Asian Equities already looked expensive - Emerging Mkt momentum into bonds/equities accelerated into Q4. However IF the UK's IMA numbers for November are replicated across Europe then I suspect that support has already slowed; IMA showed a fairly large rotation into Cautious Managed funds). What is clear is that assets are on the move again and rotating. If we look at the latest confidence indices then these appear to have fallen back by December; (still well above 2008 but down nonetheless) - the 'herd' seemed to be taking stock of the strong recovery and perhaps profit-taking on the assumption of a sluggish 2010; (similiar to 2004).


Lipper FERI are among the best trackers of sales flows in the world and I have the priviledge of working with them closely over the years. Their Asia coverage and research is becoming especially good.

Here is a link to their latest bulletin: http://www.lipperfmi.com/FERIFMI/Information/Files/FFAsia%200911%20Nov.pdf
I'll start tracking the performance and sales flow movment for Japan funds for your benefit.

"Japanese savers moved aggressively into Real Estate, higher-yielding bonds and the more racey equity sectors.. China, Hong Kong and Japan were in fact the only exception to Asia’s one consistent theme — the nearwholesale reluctance to invest in equities. In these three markets, the overwhelming bulk of new money went into Chinese stock funds" FERI

Q. If the Japanese are not buying Japanese Equities then why should we? The answer could be currency play of Yen..?

BUT a New Year and those end of year blues may give way to a new bull market. IF we see strong 'recovery' indicators for Q1; and supportive media, then there is no reason to assume anything other than the normal 2-3 bull market. What is perhaps plausible is that the bull market will not last as long simply because the previous drawdown occured and corrected faster than usual. This is in keeping with my earlier view that cyclical volatility will become more extreme due to the increase of investor information, greater private investor controls, de-institutionalisation of assets, globalisation and the rise of high frequency trading.

So what of Japan and is it a BUY or indeed heading down to China town?

A misnomer? Japan has always traded somewhat out of sync with its neighbours and indeed US/Europe. Primarily this has been much to do with the industrial make-up of Japan and it's unqiue inflation cycle and banking set-up. Japanese financial policy and political volatility have driven a weak Yen, which in turn fuelled the Yen carry-trade - for me this has been used excessively by outside investors/banks to keep the Yen weak. It has been the convenient source of easy liquidity to grow markets. However now Japanese banks are  strong again; (if a shadow of their former pre-97 glory).

The economics of Japan are complex and not entirely convincing - too much for me without some saki; and sometimes I don't think anyone really knows why Japan is out of sync with its neighbours. As China, India and Korea become more influential as trading partners within the ASEAN sector then perhaps that legacy won't last forever.

As one Hargreaves analyst wrote recently.. "After 53 years of single party dominance the market is still searching for firm direction from the newly elected Democratic Party of Japan. Will they be able to deliver the changes set out in their campaign? The jury is still very much out, and many in Japan remain sceptical. Nonetheless, in contrast with the previous government, the new Prime Minister has stressed the importance of deepening ties with other countries, notably China. This is a sign that Japan might become more fully integrated into Asia, which could be positive for many Japanese firms in the long term. Despite its problems, I think Japan still possesses the ingredients for a potential bull market: Low valuations, growth in mergers and acquisitions (Panasonic has just bought 50% of Sanyo for example) and a recovery in company earnings. I remain of the opinion that Japan will eventually have its time in the sun. What is still unclear is what the catalyst will be for market sentiment to improve."

So - simple says - for me Japan's TOPIX looks cheap at 3-5 yr levels - I am prepared to sit out for a cpl of years for a 20-30% recovery, vested via a cheap ETF. I am less certain of tier 2 smaller companies and so have opted for the main index; (the discount looks similiar). The one risk I haven't taken into account is Sterling v Yen and perhaps based on my notes above I should focus on the Yen rather than the stocks..