2005 - Not a Small Cap Or A Japan Blue Chip Year

Despite an economic recovery that was being driven by exports and China in particular, Japan's international blue chips have underperformed, and the small caps are waning.

(PRWEB) December 20, 2004 -- There will be no Santa Claus this year as far as Japanese stocks are concerned. Investors remained too concerned about a peaking economy.

While Japans cyclical economic recovery was driven by external demand in general and China in particular, Japans representative blue chips have lagged in 2004, despite the boost from a digital consumer electronics wave instigated by the Athens Olympics. In addition, the JASDAQ and TSE 2 small caps have historically performed best in the early stages of the expansionary phase of a cyclical business cycle. This time, they massively outperformed a struggling NASDAQ driven by active individual investor participation.

Japans individual investors have now retreated somewhat to the sidelines, removing a great deal of support for the JASDAQ and TSE 2, as they account for the bulk of trading value (70%-plus) in Japans smaller markets. Until the trough of the cyclical downturn can be confirmed and individual investors renew their trading activity, 2005 may not be a small-cap year, nor an international blue chip year. However, Japans domestic institutional investors remain bullish about stocks, and plan to increase allocations given the right market timing--ostensibly after books are closed in March, 2005. In addition, Japan is increasingly looking like a late-comer among its developed nation peers, while there are still strong expectations of a challenge of ¥90/US$ next year as the dollar continues to weaken. Thus TJI believes that particularly dollar-based investors will Japan stocks as increasingly attractive going into Q2 2005 as they can also expect currency gains.

Foreign investor focus is more likely to be on deep value and higher beta financials as Japans economy passes through its current growth recession" and resumes secular economic momentum. The relative market cap weight of financials in Japan remains well below that of other markets, implying there is still upside potential in financials (particularly the regionals and consumer finance), as the sector continues to be revived and is further consolidated with M&A activity.

###