Merrill Recommends Boosting Japanese Stock Holdings (Update2)
Feb. 23 (Bloomberg) -- Merrill Lynch & Co. recommended investors increase holdings of Japanese equities in their global portfolios, saying higher capital spending has helped boost the domestic economy and companies were making efforts to improve shareholder returns.
The global strategy team at Merrill, the world's largest securities firm by capital, on Friday raised its recommendation on Japanese stocks to ``overweight'' from ``neutral,'' in its global portfolio, Masatoshi Kikuchi, a strategist at Merrill Lynch Japan Securities Inc., said in a note to clients dated today. The brokerage upgraded Japan to ``neutral'' from ``underweight'' on July 3, the report said.
Japan's Nikkei 225 Stock Average has added 0.6 percent in dollar terms this year, making it the fourth-worst performer among the 59 global stock benchmarks tracked by Bloomberg News. Only indexes in India, Thailand and Brazil have performed worse.
Japan's stock benchmarks have lagged the performance of global equities this year even though the market has historically benefited from global economic recovery, Merrill said. A continuation of global economic expansion over the next couple of months may justify further gains in Japanese stocks, the brokerage said.
Playing Catch-Up
``Japan could be a powerful catch-up play,'' David Bowers, chief global & European equity strategist in London, said in a note to clients dated Friday. Stocks may also advance amid ``continued signs of domestic demand improvement in Japan.''
Japan's economy grew at a 7 percent annual pace in the three months ended December 2003, the fastest in more than 13 years, as companies increased investment and falling unemployment spurred consumer spending.
The Paris-based Organization for Economic Cooperation and Development projects that its 30 member countries, which include the U.S., Japan, Germany, France, Mexico and South Korea, will grow an average of 3 percent this year and 3.1 percent in 2005, up from about 2 percent in 2003.
The upgrade on Japanese equities came at the expense of stocks in emerging markets, Merrill said. The brokerage recommends investors trim their holdings in emerging markets, which it also rates as ``overweight.''
Banks, Autos
In a separate report released on Friday titled ``Less Bad News Likely Toward Early Spring,'' the local unit boosted its recommendation on Japanese banks to ``overweight'' from ``neutral,'' citing improvements in ``supply-demand conditions.''
The underperformance of Japan's stock benchmark came in part because domestic financial institutions are selling their cross- shareholdings, stakes that they bought in other companies to cement business ties, Merrill said.
Merrill also advised investors to increase their holdings in shares of automakers in part on expectations for a weaker yen against the dollar in the ``near term,'' which may help boost the value of their overseas sales. It raised its recommendation on automakers to ``overweight'' from ``neutral.''
Among other recommended sectors, telecommunications stocks and shares of brokerages may be good investments because they have been among the laggards in the overall stock market, the brokerage said.
The Topix index, which tracks telecommunications companies such as Nippon Telegraph & Telephone Corp., tumbled 12 percent in the last six months, making it the worst performer among the 33- subgroups that make up the Topix index. Meanwhile, the 17-company Topix Securities Index, which includes Nomura Holdings Inc. and Nikko Cordial Corp., lost 1 percent.
Stocks to Dump
The brokerage recommended investors lower their holdings in makers of basic materials, citing the threat of shrinking profit margins amid higher raw material prices.
It also downgraded the sector on trading companies to ``neutral'' from ``overweight'' because of ``diminished bullishness in commodity prices.''
Merrill, which expects the Topix index to reach 1,250 in the next three months, also made changes to its model portfolio. It added Nippon Telegraph & Telephone Corp., the nation's former telephone monopoly, because of the possibility of a significant dividend increase, and Mitsui Fudosan Co., Japan's biggest property developer.
Merrill Lynch is a passive minority shareholder in Bloomberg LP, the parent of Bloomberg News.
The following stocks were included in Merrill's ``Strategy Stock Emphasis List:''
Daiwa House Industry Co. (1925 JT)
Bridgestone Corp. (5108 JT)
Canon Inc. (7751 JT)
East Japan Railway Co. (9020 JT)
Fast Retailing Co. (9983 JT)
Fuji Photo Film Co. (4901 JT)
Hoya Corp. (7741 JT)
Kamigumi Co. (9364 JT)
KDDI Corp. (9433 JT)
Kubota Corp. (6326 JT)
Hitachi Ltd. (6501 JT)
Mitsui Fudosan Co. (8031 JT)
Mizuho Financial Group Inc. (8411 JT)
NEC Corp. (6701 JT)
Nippon Telegraph & Telephone Corp. (9432 JT)
Nissan Motor Co. (7201 JT)
Sharp Corp. (6753 JT)
Takeda Chemical Industries Ltd. (4502 JT)
TDK Corp. (6762 JT)
Tokyo Electron Ltd. (8035 JT)
UFJ Holdings Inc. (8307 JT)
Yamanouchi Pharmaceutical Co. (4503 JT)
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