Morgan Stanley's Japan Equity Strategy (EWJ, ITF, VPL)
Naoki Kamiyama of Morgan Stanley Japan published a piece last week in the Morgan Stanley (MS) Global Strategy Bulletin entitled, "Japan Equity Strategy: Waiting For Chance To Buy On Dips ." I have been following such a strategy with Japanese equities and will continue to do so going forward given the rather heavy daily volatility of the Nikkei 225 Stock Average and TOPIX Index.
Kamiyama begins by acknowledging that FY2005 earnings have been solid and are a confirmation of high growth rates, especially in certain sectors such as in financials. FY2006 forecasts however have mainly been conservative with recurring income growth projections averaging in the single digits.
The obvious yet key point of his article is that instability in the yen and any Bank of Japan (BoJ) rate hikes "could prompt profit taking." I agree with Kamiyama that the market is shifting towards a trading market. He views a yen or rate hike induced profit-taking as more of a temporary movement and an opportunity to "wait for dips to buy domestic demand stocks."
His fair value for the TOPIX Index 1st Section -- "about 1,700" -- is on the low-side of what I've heard from analysts and executives in Japan. The TOPIX traded lower again Thursday by 0.80% to close at 1,711.31. It reached a multi-year high on April 7th of this year at 1,783.72.
Kamiyama called the 1,600-1,650 range a "good level to buy domestic demand and capex stocks." Note that a TOPIX over 1,750 is considered high at Morgan Stanley, although he ends his piece with the following paragraph header, "Risks: Waiting for buying opportunity that doesn't materialize."
For the year, the TOPIX is up 3.7% and the Nikkei 225 is up 4.7%.
Click here for the full-text article.
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