Comment of the Day

December 18 2012

Commentary by Eoin Treacy


Eoin Treacy's view It has long been our contention at Fullermoney that a sharply weaker Yen was required in order to stimulate investor interest for Japanese equities. It may have taken longer than most people expected but this does now appear to be in the works . The election of Shinzo Abe as the latest Japanese prime minister suggests that it is now a virtual certainty that the next head of the Bank of Japan will be someone who is well disposed to monetary easing.

The Deutsche Bank Yen Trade Weighted Index was among the best performing currency indices until earlier this year when it encountered resistance in the region of 150. It has since dropped to retest the March lows and while oversold in the short-term, a sustained move above the 200-day MA, currently in the region of 144, would be required to question medium-term scope for additional downside.

The weakness of the Yen presents a challenge for foreign investors who wish to benefit from the rebound in equity prices, since they have to contend with a weakening currency. The Nikkei has rallied 15.9% from the November lows in local currency terms but only 10% in US Dollar terms. Should the pace of the advance slow down the drag of a devaluing currency can be expected to weigh further on returns. Therefore the performance of the Yen is likely to remain of considerable interest to foreign investors.

I last reviewed a number of Japan 's better performers in Comment of the Day on November 15th as additional weakness by the Yen was looking increasingly likely. A number of these shares have since rallied impressively and are now quite overextended relative to the 200-day MA. Potential for some consolidation of recent powerful gains has increased. The Nikkei is now testing the psychological 10,000 area following an impressive six-week advance. The first clear downward dynamic is likely to suggest some consolidation of this gain before medium-term demand dominance is reasserted.

The strength of the Yen has been felt most acutely by the export sector which has seen its competitiveness decline steadily over the last few years; to the benefit of competitors in South Korea , Taiwan and China . In order to identify shares that had experienced some of the largest declines but the sharpest rallies over the last month, I used the Chart Library Performance Filter to scan for companies that had the biggest gap in performance between a 12-month and 1-month time horizon. Here is a list of some of the most notable entries. The following charts are in log scale so that the current rallies can be observed against the context of the previous bear market.

Panasonic, Pioneer, Sony, Sharp, Mitsubishi Electric, Casio Computer, NEC Corp, Toshiba Corp, Alps Electric, Konami Corp, Mazda Motor, Yamaha and Shiseido are all household name companies that have moved from being among the worst performers over the last 12 months to some of the best over the last month. While the broader market is susceptible to some consolidation, these shares represent a group that is experiencing short covering and could potentially go higher. The test of whether they have in fact bottomed will be if they successfully find support above their respective lows on the first significant pullback.

Another way to approach this market would be to identify shares that are now hitting new highs. Since the market has been ranging to deteriorating for some time, I limited the Chart Library High/Low Filter to Topix shares that are hitting at least new three-year highs. The clear message from this list is the number of construction related shares both in the materials and building sectors that have moved to new highs. Mitsubishi Estate and Mitsui Fudosan completed four-year bases this week. Tokyu Livable completed a five-year base and Tokyu Land a four-year base three weeks ago. Sumitomo Realty broke out two months ago.

Among foreign affiliates of Western companies in Japan , BP Castrol posted a new five-year closing high this week to complete a lengthy consolidation.

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