International | Aug 07 2006
By Chris Shaw
Just like "sell in May and go away" is a common saying for the Australian market given its tendency to perform poorly towards the end of the financial year, the Japanese market has a similar trend towards significant movements in the key Nikkei Index during August.
This reflects the reporting of first quarter profit results from listed companies (the Japanese financial year runs from April 1 to March 31), with upgrades usually a precursor of strong gains in the index in August and downgrades resulting in significant weakness.
For examples of how much the market reacts, when results fell short of expectations in August of 2001 and 2002 the index fell 24% and 19% respectively, but last year much of the index’s 40% gain for the year flowed through from the stronger than expected earnings results in August.
The index has risen about 7% since mid-July, which followed significant weakness as in the space of a couple of months the market declined from levels of around 17,000 to below 14,500.
A report by UBS suggests further gains are possible, as earnings generally are coming in above market forecasts and a number of companies are lifting their profit guidance. The broker notes in July almost two-thirds of earnings revisions were upgrades to guidance, led by major companies such as Canon and Komatsu, a manufacturer of earthmoving equipment.
On the broker’s estimates of the 92 companies within the first sector of the market to advise of changes to guidance (which requires a change to expected earnings of at least 30% from previous expectations), 59 of the companies lifted their estimates. The broker now estimates companies generally should record profit growth of at least 10%, up from less than 4% in June.
The upgrades are coming at just in time in terms of the Japanese market’s overall performance this year, as for the year to date the Nikkei has fallen 3.8% compared to a 3.2% gain in the MSCI Asia-Pacific Index.
