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Strategies & Market Trends : News Links and Chart Links
SPXL 222.73+4.6%Nov 10 4:00 PM EST
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To: Les H who wrote (8642)9/18/2003 12:00:37 AM
From: Les H  Read Replies (1) of 29594
 
Global Asset Allocation: Buy Japan — Second Leg to Come

Stephen Roach/Global Asset Allocation Committee

Going overweight Japan; we believe another leg to the rally is in the offing. Adding 2% to our neutral position, funded by equal cuts in our U.S. and Europe weights. Our optimism is based on what we believe is a two-stage process of improvement.

Stage one of rally driven by cyclical recovery and high operating leverage. With growth emerging in Japan and ROE rising, the fair value of Japanese stocks should be approximately 10% above current prices — near the 1100 level on the Topix, according to our valuation model.

Stage two of rally likely driven by post-election acceleration in structural reform — potentially much more significant upside than that implied by recovery. We think investors should overweight Japan ahead of LDP vote. We believe Koizumi has over 85% chance of winning and translating this victory into accelerated reform.

We see greatest upside in restructuring sectors and domestic-oriented cyclicals. Restructuring opportunities are likely in real estate, banks, and sectors such as construction. From a cyclical perspective, focus on select chemical and consumer stocks such as specialty retailers.

Risks: Recessionary relapse and failure of reform process. If the reform process falters, the Topix may be condemned to trade in a broad 800-1200 range; a global or domestic recessionary relapse could swiftly take Japanese stocks to the lower end of this range.

morganstanley.com
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