The Nikkei may have plunged over a 1,000 points, or 10.55% overnight, adding to Monday’s 6.2% fall, but Credit Suisse’s Andrew Garthwaithe says stay in Japanese equities.Investing in Japanese equities was one of the most conventional trade ideas of 2011, and supported by many Wall Street titans, like Nomura, Goldman Sachs, and JPMorgan. But now investors are pulling their cash out of the country, fearing the worst from the nuclear disaster.
But Andrew Garthwaithe says hold on for several reasons.
The first, fiscal stimulus:
Our economists believe that this earthquake will take 0.2% off GDP this year (up to 0.5 – 1% in a worst-case scenario) and that there will be an initial fiscal emergency package of Y2trn ($24bn), with the Japanese Finance Minister suggesting fiscal measures totalling Y3.2tn+ ($39bn), equal to the amount of the three supplementary budgets implemented after the 1995 Kobe earthquake. Indeed, the threat of fiscal stalemate in the Upper House caused by the opposition LDP blocking the budget of the DPJ is likely now to be alleviated as parties are likely to work more closely together in response to the tragedy.
The second, yen intervention:
We believe that this time around the authorities would cap the strength of the Yen. Indeed, back in September the BOJ (instructed by the Ministry of Finance) intervened for the first time since 2004 to cap the strength of the Yen. More importantly, the 2 year note yield differential is consistent with a weaker Yen. Additionally, back in January 1995, the Yen was supported by the Mexican debt crisis and Germany cutting rates. The Yen actually depreciated against the Swiss Franc in Q1 1995 showing that there was a general environment of dollar weakness. Our FX team forecasts USD/JPY 89 by year-end.
With the Bank of Japan already offering up 20 trillion yen ($245 billion) to soothe the liquidity problem, they seem ready and willing to act to flood the market with additional cash to drive the value of the yen down, which could eventually be bullish for exporters.
The third, the deleveraging process from its housing bubble is nearing an end:
The housing bubble was still deflating in 1995, with the house price to wage ratio still 9% above average, compared to 28% below average now. According to the IMF, Japan’s housing market is the second cheapest globally.
And the fourth, Japanese stocks are still cheap:
Back in January 1995, Japanese equities were clearly not cheap – unlike today. Japan’s 12m forward P/E was 56x, compared to 16x for global markets. Today Japanese stocks trade on a 12m forward P/E of 13x (compared to 12.2x for global markets). Back in 1995, Japan’s price to book was on a 6% premium to global equities, compared to a 40% discount today.
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