Special Feature
If these policies are implemented, it could set off a powerful rally in the stock market that looks already to be germinating to us and which would eventually pull the Japenese public back in, having been largely absent the market for several years now. With a substantial fall in the yen, Japanese corporations would become more competitive and the “E” side of the PE ration could rise quite sharply, given the inherent operational leverage in Japan Plc. There could also be a massive switch of capital from Japanese government bonds back into equities as an inflationary dynamic comes into play. We also think the rally in the Nikkei would far outweigh a plunge in the yen, but of course one of the beauties of spread betting the Nikkei, is the fact that the devaluation risk is taken away from you as the bets are denominated in sterling. In a cracking technical sign that is almost failsafe over medium term timescales, many stocks in Japan have now broken out to the upside for the first time in nearly 2 years, despite seemingly “dismal fundamentals”.
Bonds are the order of the day, but pressure on the yen and from a rapid money supply expansion could see capital begin to migrate back into equities and property — and which has also had similar bear market conditions. The Nikkei is unquestioningly cheap with the current valuation essentially factoring in pretty much zero or even declining GDP on a continuous basis and, ditto, a falling population. Many of the top 225 companies that make up the index are still trading at less than book value - in complete contrast to the US where stocks, on average, trade at nearly 2 times book. In looking at the 20 year monthly chart of the Nikkei v S&P 500 below, and contrasting with the valuation parameters of each of these markets, our call for sustained outperformance of Japanese equities relative to the US, and likely the World index, looks to be very much intact. We can see from the chart that effectively every 4-5 years the Nikkei outperforms the S&P by quite a margin and we think we are in the nascent stages of this. For the more risk adverse traders, this looks like a cracking medium-term pairs trade.
The market seems to be pricing-in a major sea change in the economic environment and we believe this event will be a substantial change in monetary policy settings at the Bank of Japan as a consequence of Abe’s election win. The Japanese public has pretty much disengaged from equities altogether since the bear market began back in 1989 — 23 years long and one of the longest in recent memory for a development economy’s equity market.
60 | www.financial-spread-betting.com | January 2013