Japan Is Surprising to the Upside

09/11/2012 8:30 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

While China moves to create a more consistently stable path to growth, Japan is coming out of its decades-long doldrums. The question is whether this is a short- or long-term run, observes Yiannis Mostrous of CGM Partners.

Gregg Early: I'm with Yiannis Mostrous, a partner at CGM Partners specializing in global strategies. We're going to talk about the state of the global marketplace today. Particularly, I'd like to start by asking about China and whether China is slowing or speeding up here. Should we have hope, Yiannis?

Yiannis Mostrous: China is slowing down, and has been slowing down for the past year. The issue is, of course, that a lot of people are very scared of a China slowdown, and the usual bears have come out declaring one more time that collapse is imminent in China and social arrest would happen and all these things.

My view is that there are obviously a lot of issues long term...tax law issues in China, as there are in other economies around the world for that matter. But the leadership is trying to fix these problems, and I think until now, they have been doing a good job.

Short term, I still believe, as I wrote in the beginning of the year, that China will deliver a GDP growth of 8% for 2012, which given the global situation will be a very good number. Basically, I look at China's slowdown as a short-term situation-basically a cyclical slowdown rather than a structural one-and I think that the government there is ready to spend enough money to help the economy through this soft patch.

Gregg Early: So, if it's 8% GDP growth, I guess that means that you're seeing a bottom and that growth starts again, albeit slowly.

Yiannis Mostrous: Yes, yes. China is going to continue growing between 7.5% to 8% I think. The years of 9.5% and 10.5% and 11% GDP growth are gone.

Now, the priorities in China are different. They want more people to join this economic growth, and they're more interested in sustainable growth, which is 7.5% to 8% or 8.5%, than just a crazy GDP growth rate of 10%-plus.

Gregg Early: Yes, well, I'd certainly be happy with 7% GDP growth here.

Yiannis Mostrous: Yes, yes, that would be good. Although this is a different economy. The United States is a mature economy.

As a matter of fact, I am quite positive on the United States economy, and I think it has done better than a lot of people were expecting in the beginning of the year or at the end of 2011-even with today's payroll numbers, which are lower than expected, but I still think they're pretty decent given what's going on globally.

Gregg Early: Could you speak to what's going on globally, as far as do you see things improving? It sounds like China seems to have bottomed, which is a main driver of what's going on in the global economy at this point.

You say it looks like the US is gaining its strength back. What do you see in Europe or South America at this point, or just in the global context of all the markets?

Yiannis Mostrous: Europe obviously is not in a very good position right now. Of the major economies there, the only ones that are doing relatively well are Germany and France. Even the UK, which is outside the Eurozone obviously, but still a part of the European Union is not doing as well as people thought they would, and I don't think that the situation will improve dramatically there very soon.

The Europeans have a unique way of dealing with things, which is slowly. And maybe sometime in 2015, or 2014, we're going to see something better coming out of there.

Beyond that, the other major economy that I think has been underestimated is Japan. There are a lot of changes that are taking place there, the main one being that we have bigger infrastructure spending and construction spending after the tsunami, which has been helping the economy along.

For the first time in a long time, we have been seeing the wages going up in Japan, which is a good thing for consumption, and is obviously based on the fact that the workforce has been shrunk. And then people that are still working have a bigger impact on the money they spend.

Gregg Early: So Japan's finally moving past its stagflation.

Yiannis Mostrous: Well, this has been predicted a lot of times.

Gregg Early: Right.

Yiannis Mostrous: So, I'm not going to go there, but if one sees the deflation numbers, they have been improving rather than falling back into the abyss. So I mean obviously we're talking about 2s and 3s, but this is on an uptrend.

Gregg Early: Well, that's encouraging. Are there any stocks that you like to play this trend?

Yiannis Mostrous: Well, I would go with domestic stocks that are going to benefit from the changes that are happening in construction and especially apartments and offices.

My favorite there is Mitsubishi Estate (Tokyo: 8802, or MITEY) and also I like Fast Retailing (Tokyo: 9983). The latter is a great play, even globally, because they are in the business of selling fairly good-quality clothes at low prices, and they have been catching on not only in Japan but also in China and even the United States.

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