There’s a basic formula for trading Abenomics:
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When the European Central Bank governing council meets on Thursday in Frankfurt, sushi is unlikely to be on the menu. But officials should have a concern: is the eurozone turning Japanese?
This chart shows headline inflation (in Japan the measure excludes fresh food) for Japan since its bubble turned to bust in 1990, heralding a slide into deflation. Radical action by its central bank is just beginning to return price rises, as the far right hand side shows.
Here are the two Japan charts that matter after Japanese shares plunged more than 5 per cent today.
First, the Nikkei 225 Average is poised at the 50 day moving average, an important technical support level. If it recovers from here, this will be nothing more than a correction, if a big one, of the excessive optimism which had taken hold. From their peak last Thursday to today’s low Japanese shares were down almost 15 per cent – but are only back to where they stood a month ago. The rally can continue, as the futures market suggests, with futures prices and bond yields both rising sharply after the cash equities market closed. But once the current volatility settles down, a continued rally is likely to come at a far more moderate pace.
The Nikkei 225 is down more than 7 per cent today, its 11th biggest daily fall since it was created in 1950. Explanations abound: the hawkish interpretation of Ben Bernanke’s testimony to Congress (although it can be read either way), the hawkish interpretation of the Fed minutes (ditto) and the surprisingly weak purchasing managers’ index from China, showing manufacturing shrinking slightly.
All these no doubt matter. But the real question is why markets chose to care today. China has been slowing for months, and while Fed-ology always moves prices, it was particularly hard to read anything much new into Wednesday’s comments.
Today sees the publication of Credit Suisse’s annual Global Investment Returns Yearbook, a mammoth piece of research into global long-run returns overseen by the London Business School academics Elroy Dimson, Paul Marsh and Mike Staunton. It is an invaluable resource, and this blog is likely to mine its contents for some days to come.
Revisions for this year help ram home one quick and spectacular lesson from history. Baron Nathan Rothschild is widely believed (wrongly, according to historian Niall Ferguson) to have said that you should “buy when there’s blood in the streets”.
Much of the time this advice works. Buying into Japan or Germany after the second world war would have worked out extremely well, and the greatest buying opportunities almost by definition come when it seems almost mad to buy.
But the aphorism is not infallible. This year, the academics tried to address their concern that their global stock market index suffered from “survivorship bias”. So they have recalculated them including three new countries that were not previously covered in their attempts to calculated the global equity risk premium: China, Russia and Austria. Adding these nations hugely changes the perception of long-term risk.
Let’s start in Russia. Any bold contrarians who decided in the late 19th century to bet on Tsarist Russia to outperform the US for the long-term, and held on even during the great political unrest of the attempted revolution of 1905, would for a long time have looked very clever.
The chart compares the St Petersburg stock exchange’s composite index performance with that of New York. After 1917, of course, the value of any equity investment in Russia was wiped out. This might appear to be an exceptional example. But it is not. China also had a revolution that led to the closing down of its stock market (and of capitalism for a while), and that happened within living memory. On the eve of the second world war, China’s returns looked very healthy. With the arrival of Mao, shares went to zero (and international investors have had a rough ride even since Chinese stock markets reopened).
Using the MSCI China index, covering stocks available to international investors, those who bought in 1993 have actually lost money. But Chinese stock markets have been recovering recently. And, deliciously for those who like historical ironies, the Shanghai Composite, the main domestic index, bottomed last year at 1949, the year of the revolution.
Japan is the natural home of the bear, but its bull market from 2003-2007 looks very like the current US bull market. James Mackintosh, investment editor, looks at the parallels and considers what’s needed to keep the bulls running.
FT investment editor James Mackintosh suggests the warnings of monetary policy hawks about central bank independence may be a little premature. He says Japan’s central bank has paid no more than lip service to the demands of new prime minister Shinzo Abe.
Goldman Sachs’ strategists are currently roaming Europe on their annual Global Strategy roadshow. As nobody can lightly ignore what Goldman is saying, the themes emerging from the London event were interesting.
Of particular concern are the prospects for corporate earnings; Japan; and the hope that 2013 will at last be the year for a “great rotation” out of bonds and into stocks.
On earnings, David Kostin, their US equity strategist, explains their view in the video below. In a nutshell, margins are high, but without a recession (which nobody expects) there is no need for a sharp reversion to the mean. Instead, forces such as shale gas will help profitability, but there will be little increase in margins as in many sectors they are already at historical highs. So margins stay at their plateau, and earnings rise gently thanks to the gentle recovery of the economy.
On Japan, bullishness is what might almost be called a “consensus contrarian” call. Many people are talking bullishly about Japan, despite its decades of under-performance. So many, indeed, that it is hard to call this call contrarian any more.
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