Japan: A Rising Sun

12/09/2005 12:00 am EST

Focus:

There has been a noticeable shift among advisors towards bullishness on Japan. Here, we offer commentary the "land of the rising sun" from John Bollinger, Martin PringKen SheaJim Stack, and Schaeffer Investment Research's Rick Pendergraft. 

(For more on the advisors cited below, please click on their photos.)

Bollinger, John"The most interesting story on the international front remains Japan," says John Bollinger, editor of the Capital Growth Letter. "The Japanese market is now up nearly 30% on its latest upswing and is in the midst of a breakout from a long-term base built after a major collapse. Back when Japan started down I forecast that the Nikkei, then still trading over 30,000, would trade for less than 10,000. It took some time, but it proved out. Ironically, making long-term calls at major transition points is actually easier than short-term investing, as the 'noise' is lower and the situation is clearer. 

"The Japanese market has closed over 15,000 for the first time in five years. The relative strength ratio shows that the Japanese market has been outperforming the US market since the middle of 2005. That's right around the time that gold started its latest bull run. As I've suggested before, I believe the new leadership coming from Japan is one of the factors behind the global buying of bullion as the era of Japanese deflation comes to an end. Overall, from a long-term perspective, a proper strategy would seem to be to buy Japanese stocks on pullbacks."

Pring, Martin"The longer-term indicators are pointing to the fact that the current bull market in the US is in the process of turning over," says technical expert Martin Pring. "While a year-end equity rally is a distinct possibility, if it does materialize, it will likely be the last hurrah of the bull market. So where do we see value now? The Japanese market continues to look attractive from a long-term point of view, so a 10% allocation is recommended in the form of the  iShares MSCI Japan (EWJ ASE). We are less enthusiastic about the other Asian ETFs. Frankly, with the exception of Japan, we are not comfortable with the current technical position in other Asian markets."

Shea, Ken "In our exchange traded fund portfolio, we have recently added a new position in Japanese stocks," says Ken Shea in Standard & Poor’s The Outlook. "We believe that Japan has finally ended its long economic slumber. In the first half of 2005, the Japanese economy grew at the fastest rate in 15 years. In September, the country’s exports set a new record, at the equivalent of $51 billion, on strong demand for mobile phones and flat-panel televisions. Although imports also increased, in large part because of higher oil prices, Japan continues to run a trade surplus. And we believe that most Japanese industries are more energy efficient than their global competitors.

"In addition, we think Japanese Prime Minister Koizumi’s victory in recent national elections means that needed reforms will be made in the country’s economy. The iShares MSCI Japan Fund (EWJ ASE) has been traded since 1996 and currently has $9.7 billion in assets. As of September 30, its top positions were in banks (11.6% of assets), automobiles and components (11.3%), capital goods (10.3%), and technology hardware and equipment (9%). The portfolio has a beta of 0.88, meaning that it is less volatile than the S&P 500."

Stack, James"We’ve increased our investment in foreign markets by adding to iShares MSCI Japan (EWJ ASE), bringing our total Japan allocation to around 9%," says Jim Stack, editor of InvesTech. "A key factor in our decision is the recent improvement in Japan’s domestic demand, which is looking better than it has in years. This is a critical step in making the current recovery less dependent on American markets.

"Looking back, Japan started this year as the dark horse or a contrarian’s delight, depending on how one viewed the economic reports. Prospects of sustainable growth in Japan have improved dramatically over the past nine months. While the recovery in Japan remains fragile, we still consider Japan and Asia among the best foreign investment opportunities for the coming year."

Schaeffer, Bernie"It is a little difficult to measure the sentiment on the iShares Japan (EWJ ASE), because we do not have a years worth of options data and there isn't any analyst coverage because it is an ETF. Notes Rick Pendergraft, an analyst with Schaeffer's Investment Research . " The two pieces of data that we do have are showing increasing pessimism as the EWJ has been rising. The open interest ratio has been trending higher and the number of shares sold short has increased sharply over the last six months. As a matter of fact, the short interest has increased from 7.16 million shares in May, to over 24.7 million during November. This gives the EWJ an ample amount of pessimism that may allow it to continue the rising trend it has followed since mid-August."

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