International | Jun 15 2006
By Rudi Filapek-Vandyck
Stop scratching your head, trying to figure out what exactly caused significant turmoil on global equity markets over the past few weeks. Insiders at some of the world’s largest financial institutions have already done the thinking for you: it all has to do with money flows. Money flew out of the markets from May 10 onwards, asset prices tanked. It’s as simple as ABC.
At NikkoCitigroup, part of one of the largest financial institutions in the world, the Japanese equity strategists blame it all on money flows. The impact of foreign investors on markets in Asia, including Japan, is nowadays so large, it doesn’t really matter what local investors or institutions are deciding these days, the strategists suggest. If the foreigners decide to shift their funds elsewhere their decision rules the market, and that is exactly what has happened since mid-May.
This would go a long way in explaining why, for instance, US stocks have lost only circa 5% in a few weeks, but Japanese stocks experienced a fall of 17% in the same period.
The strategists believe seeking an explanation in the shifting around of funds by major international investors is likely a more realistic explanation for what has happened recently, instead of trying to figure out whether the market fundamentals have changed. In case you’re in doubt: the fundamentals haven’t changed, NikkoCitigroup says, so a better explanation would be option number one.
The good news about this is that money can only be withdrawn and shifted elsewhere once. So if the fundamentals haven’t changed materially we should soon see a bounce back to where the market was, and possibly even higher. That’s exactly what NikkoCitigroup believes is going to happen.
The strategists have a year end-2006 fair value for the TOPIX of 1,600, but they believe the market is likely to overshoot (as the bulls will return to rule again) and on top of this current earnings estimates are expected to increase over the next few months. So expect the TOPIX to reach 1700 instead, the team says.
NikkoCitigroup would recommend investors buy into companies with strong earnings whose share prices have fallen substantially. Among the ones that match the profile and are considered attractive are Toyota Tsusho, Hitachi Chemical, Mitsui Mining & Smelting, JSR, Aeon Credit Service, and SMC.
Alas, not everyone shares the opinion of NikkoCitigroup strategists. Over at JP Morgan, market strategist Hajime Kitano is not so sure about market fundamentals not having changed. Doubt about the outlook for Japanese equities has started creeping in recently, and has grown stronger ever since.
In his latest updates on the Japanese market, Kitano is leaning towards an increasingly bearish scenario for the market as the Japanese economy is expected to start showing signs of contraction over the next few months.
He believes the market is definitely in for a bounce from its current levels, which may or may not be the lows for this year, but the trend may turn south sooner than is now anticipated, Kitano says.
He sees a closer relationship between what happens in the US and the Japanese share market than NikkoCitigroup does. Assuming the Fed only raises US interest rates once more this year, at the end of this month, a rebound of Japanese shares in line with general relief the world has seen the peak in US interest rates in this cycle is regarded very much likely.
Depending on what the economic data will show, investor attention may soon turn to slower economic growth again, and Kitano believes that may signal further losses for the share market.
According to Kitano, taking into account the current business conditions in Japan, it can be expected for the Nikkei Average to find market support at around 14,000–14,150. However, if business conditions were to deteriorate in the months ahead, this picture will probably change due to possible downward revisions to the aggregate profit growth estimates for Japanese businesses. Were this to happen, the JP Morgan strategist believes a Nikkei Average of around 13,000 "would seem reasonable".
The Nikkei closed at 14,309.6 on Wednesday.
