Equities: August 14
Nikkei: Just Do It At last. The Nikkei has finally broken through the key 12,100 level to which we have long been alluding. Whilst holding a constructive view of this market for several months, we have always stated that only a break of this level would make us really bullish. The trouble is that every investor is now looking at the same technical picture. As such, there may well be an initial retracement, with key support levels existing at 12,100 and 11,900. That said, the medium-term outlook is most encouraging. On a fundamental basis, the Japanese economy is finally showing signs of a sustainable recovery, despite the numerous false dawns of recent years. This time around, the revival is being underpinned by domestic demand, due to improvements in the labour market and corporate profitability. Indeed, household spending in Q205 rose by 0.7% q-o-q, following a 1.2% q-o-q rise in Q105. In addition, the 11.1% jump in machinery orders in June, taking the six month average annual rate to 5.0% from 3.9%, highlights the more upbeat sentiment within the business community, as reflected in the past few Tankan reports. As a result, although Q205 real GDP data was a little disappointing at 0.3% q-o-q, equivalent to an expansion of 1.1% on an annualised basis, the underlying trend is still positive. Going forward, consumer spending and corporate investment are key drivers of growth. With company profits remaining strong, domestic demand should continue to underpin the recovery. The Bank of Japan has even suggested that annual CPI could start rising by year-end, or early 2006. That said, we see little chance of any move on monetary policy for some while yet. Furthermore, the latest political polls indicate that the electorate supports the actions of Prime Minister Koizumi to dissolve the lower house and call an election. This bodes well for a return to power for the premier, albeit with the possibility of a reduced LDP/Komeito coalition. This scenario would at least mean that postal reform is still a possibility at some point in the future. Against this backdrop, and one of increasing foreign investor interest, the Nikkei continues to look like a good medium to long-term bet. We envisage a move towards 15,000 over the next 12-18 months. One key risk is oil, which shows little sign of falling in price, and will therefore raise the Japanese import bill. Thus far, the world is coping with higher energy costs, rendering the jump in Asia equity valuations over the past months that much more impressive. However, a sustained rally in oil prices from current levels is a clear threat to regional and global economic growth. Partly for this reason, we re-iterate the medium-term nature of our view on the Nikkei.
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