Japan's Small Caps Are on Fire

08/03/2009 9:45 am EST


Eoin Treacy

Global Strategist, Fullermoney.com

Japanese small caps are bucking the global preference for larger firms, while automakers have joined the cyclical rally, writes Eoin Treacy of Fullermoney.

[Over the last two weeks,] a number of [common] themes have become apparent. The first is that in the Organization for Economic Cooperation and Development (OECD) and Asia, large caps have been some of the best performers. Companies with a strong international brand have tended to outperform. Companies offering exposure to Asia's growth centers and to the domestic economies of larger emerging markets have also performed admirably. Technology shares have been leaders in a wide number of markets.

[But] in Japan, small caps are leading the market higher. In 2003, small caps also outperformed and price-to-book levels are advancing from a similar depressed level on this occasion. The possibility that smaller companies are less affected by the relative strength of the yen and more leveraged to the domestic economy may help explain this phenomenon.

Each country has had at least one bank that has outperformed the broader market. This is not the case in Japan. However, while the Japanese banking sector is not conforming to the international trend, other sectors are. In Europe, Daimler (XETRA: DAI.DE), BMW (XETRA: BMW.DE) and Volkswagen (XETRA: VOW.DE) are making new highs. Hyundai (KSE: 107560.KS) and Kia (KSE: 000270.KS) [have been leading in Korea, as have Nissan (Nasdaq: NSANY) and Suzuki (OTC: SZKMF.PK) in Japan.] Nidec (NYSE: NJ) is also involved in the auto industry and continues to post new highs within its tight uptrend.

Breweries were also among the best performers in a number of regions. Among these were SAB Miller (OTC: SBMRF.PK) in the UK and Fosters (Sydney: FGL.AX; OTC: FBRWY.PK ) in Australia. In Japan, Asahi Breweries (ASBRF.PK), Kirin Breweries (OTC: KNBWY.PK), Sapporo (TSE: 2501) and Takara Holdings (TSE: 2531) [have outperformed.]
Toshiba Plant Systems (TSE: 1983) has often been mentioned [here] as one of the few pure plays on nuclear-reactor construction. It continues to trend higher and is testing the 2007 high near Yen1200. JGC Corp (TSE: 1963) is also involved in the nuclear industry and continues to trend higher from depressed levels.

Railways such as Tobu Railway (TSE: 9001) [and] packaging companies such as Toyo Seikan Kaisha (TSE: 5901) are also outperforming. The Sumitomo group of companies are almost all outperforming, but Sumitomo Electric Industries (TSE: 5802) stands out. Nippon Kayaku (TSE:4272) is one of the most notable outperformers [among the generally strong chemical companies]. Textile maker Toyobo (TSE: 3101) is also leading higher. A number of technology-related companies are also among the better performers. Olympus (TSE: 7733) has one of the more consistent chart patterns.
As with the USA and UK, strong cash flows from well-established businesses are receiving investor attention and [are] outperforming. [In Japan's] export-led economy, the strong yen is doing most large caps no favors, but [many] somewhat smaller companies are outperforming the wider market by a considerable margin.
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