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The 'Honda' Accord

Posted by jdavis on March 21, 2011

Whenever central banks and governments get together to agree to intervene in currencies for ‘global stability’ (AKA global inflation), they tend to name the interventions as ‘Accords’.  Hence the title of the recent intervention to reduce the value of the Japanese Yen as it soared following the earthquake and Tsunami.  (It soared as the Japanese Central Bank and insurers needed Yen (and cash full stop) to pay claims and pump money into the markets, so holdings of other currencies were sold off.

At the same time, you may have seen the Japanese stock market plunged in a few days by nearly 20%.

It got me thinking… (Uh oh, they groan.)

I don’t normally recommend long term investments in individual stock markets.  This is because a) stocks have not been particularly good value for years and b) I’d rather be in commodities if I am going to be in equities.  However, if the Japanese market were to fall a further 15+%, net, then that could be an excellent long term buy point.

My reasoning is this:

  • Japan is one of the top exporting nations on Earth and with some great global brands in high end product areas such as, diversely, motor vehicles, electronics and media
  • The stock market is back to 1984 levels (shall I say that again?).  Prices are back to pre bubble levels.  All bubbles burst eventually (even housing ones…!)
    • If the market takes a further lunge down then we can say there is real value in Japanese stocks (not often you can say that about large developed markets).
  • Japanese government debt is already 200% to GDP (far greater than any other G20 nation).
    • Debt will go even higher a) due to Tsunami reparations and b) because their demographics are just dreadful, in that their aged and aging population is larger than any in G20 (as a proportion of the population) so their cost of welfare will soar and c) they continue to prop up failed banks (after all these years how can they learn NOTHING?)
    • So, it seems likely that they will move from long term deflation to inflation by higher and higher interest rates (but still lower rates than needed to hold down then inexorably rising inflation in the long term)
    • This could lead to higher and higher stock prices.
  • To put it bluntly, after an 80% fall from the bubble peak, I would suggest that it would not fall much lower, sustainably.  In any case, risk to capital is reduced by buying at much lower prices at which other investors bought.To balance this would be a lower and lower currency however not falling at the same rate as the stock market rises, if we are right.

Thus, as foreigners investing in Japan, our investments would be hit by a falling Yen.  However, my view is that the market will rise faster than the currency depletes.  Also, if global investors decide, too, that Japan is worth investing in, that will hold up the currency.

As a long term holding, alongside commodities, I will make the Japanese market a recommended buy and hold for relevant clients should this market take a further lunge down to below current levels (already 10-15% lower than recently.)


Brief update on Wider markets

Our view remains that there is a low probability of a sustainable peak significantly higher than the February high, for some while. Yes, we could see soon a breach of the high however we do not believe it would be the start of a new rally.  Whether or not we have seen the high, for now, we believe this Spring / Summer will see significantly lower levels than today.

This is predicated on QE2’s influence having waned and QE3 not available till later in the Summer or in time to save the markets from a sizeable fall.  I wrote about this in the previous Clients’ Only update (16 March).

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