Have the Bulls Rediscovered Japan?

04/01/2010 11:34 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

There's no better time to check the score than at the quarter's end on April Fool's Day, if only as a reminder that the sample size for 2010 remains quite small, and is liable to make a fool of anyone who treats the recent trend as gospel.

So, all those who predicted three months ago that the best-performing G-7 stock market would be Japan, kindly take a victory lap in your Toyota. According to MSCI Barra, Japanese stocks are up nearly 8% so far this year.

Wire-service market dispatches routinely attribute the Nikkei's gains to strength among the multinational exporters. And these have certainly done their bit, benefiting disproportionately from emerging-market growth and the US rebound.

But it's worth noting that in Japan, as throughout much of the world, small caps have bested the behemoth stocks. It's a "tell" that points to a broad cyclical upturn rather than any sort of double dip. 

Japan has rallied despite Toyota's (NYSE: TM) woes, and despite the fact that the yen has been up for much of the past quarter. It might just be that the Nikkei is the most oversold market measure on earth after its 82% slide from the 1989 peak to last year's low. When Japan is brought up at all these days it is usually, as in Paul Goodwin's commentary, as a cautionary tale about misfortunes that can befall heavily hyped Asian powers.

The takeaway from Jim Jubak's look at Beijing's banking policies is that the Chinese "miracle" is partially underwritten by accounting gimmicks, like most other such outbursts of economic enthusiasm. But as Japan's experience has shown, and may continue to show, many a speculator has bit the dust betting against the follies of governments.

Better to bet against those betting against, as distressed debt funds did in scooping up the Islamic bonds of Dubai's state-owned property developer at 38 cents on the dollar, at their December lows. Their faith was rewarded this week when the government stepped in to redeem the securities at face value, to avoid development disruptions. Oil money is floating most Middle East boats: stocks in United Arab Emirates are up 6% in 2010 while Saudi Arabia is up 13% and Kuwait has spurted 21% higher.

Greece's paymaster has been sterner than Dubai's: Germany's idea of a financial rescue, foisted on the rest of the continent last week, is one that doesn't do anything to help the injured party, and doesn't cost Germany any money. That's left buyers of the bonds Greece issued last week with quick losses in the secondary market. But fears that Greece would somehow grease the global rally's skids keep proving unfounded.

With so much quick money already made, bargain hunters must look to the overlooked and the plain unloved. John Snowden believes a specialty UK pharmaceutical supplier fits the bill, while Benj Gallander likes the risk/reward on the publisher of Harlequin romances as well as the Toronto Star.

Investors sleeping while markets roar probably can't count on a shining knight to end the torpor. They'll just have to wake up to the fact that government support is not the worst thing that's happened to the world economy.

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