Rhodes to Japan

01/09/2004 12:00 am EST

Focus:

Richard Rhodes

Founder, Rhodes Capital Management

The Top Pick from Richard Rhodes is unusual for this report; rather than being a single stock, he is betting on a single theme--the expected outperformance of the Japanese market. Here, the technician and trader offers his overview and a trio of ETFs to play this trend.

"As we enter into the New Year, we have left a year in which the equity markets have rallied substantially off their lows–with the prospects seemingly good for 2004. That said–we find ourselves looking over the calendar year for fundamental themes upon which the capital markets will focus, and in our estimation–a long neglected and rallying Japanese Nikkei 225 will prove to be one of the larger winners in terms of relative and absolute performance. In fact, we expect the Nikkei to outperform the US large-cap S&P 500 Index by a wide margin–as the Asian economies tend to outperform the Western economies, thereby attracting capital.

"A bullish 'declining wedge' pattern is forming, which in technical terms is a bottoming formation that will end many years of under performance. And while it has yet to break out…we must 'look over horizon', and in fact do see a breakout developing in 2004 that will last many years into the future. If we had to venture a guesstimate, we would look for the Nikkei to outperform by a very large 50% over the next two years, and this could very well turn out to be the largest trade of the year. We shall use exchange traded funds and ADRs to take advantage of this. More specifically, our ETF choices would be the Japan Equity Fund (JEQ NYSE); the Japan OTC Equity Fund (JOF NYSE); and WEBS Japan (EWJ ASE)."

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