DD, I think we'll see a bounce on the OSX, just not sure if it will be this week. Recent activity was due to end of the quarter window dressing, profit taking, and confusion over the supply statistics as well as concerns that the oil producing nations won't continue to hold the line on production.
The reason that I think that oil will continue to rise is that demand is likely to increase, particularly fueled by Asia's economic recovery. Mutual fund money flow confirms reasons for being optimistic on Asia. From Bloomberg this weekend:
quote.bloomberg.com
Foreigners Buy Japanese Stocks, Get Yen Bonus: Focus (Update2)
By Miki Anzai
Foreigners Buy Japanese Stocks, Get Yen Bonus: Focus (Update2)
(Updates Nikkei numbers and yen in 2nd paragraph)
Tokyo, Aug. 5 (Bloomberg) -- The portfolio of Barclays
Global Investors, the world's largest institutional money
manager, includes $30 billion worth of Japanese stocks this year
-- without any provisions to hedge against yen exposure.
Given the benchmark Nikkei 225 stock average's climb by
about 25 percent so far this year -- trading around 17,300 today
-- the yen's 0.9 percent decline to near 114.50 to the dollar
looks trivial.
''Currency risk is minor compared with the equity
potential,'' said Steven Schoenfeld, head of international
equity strategist at San Francisco-based BGI, with more than
$670 billion in total assets. ''We could easily see 20,000 to
21,000 on the Nikkei by the end of the third quarter, or
certainly by the end of the year.''
International investors like BGI could enjoy another 20
percent gain in Japanese stocks, as long as the yen doesn't eat
the gains by falling to about 140 per dollar. Foreign equity
managers say they'll pour more money into Japanese stocks
without hedging against a possible depreciation of the yen.
While many Japanese investors doubt the Nikkei will top
20,000 this year, global investors are more optimistic about the
world's second-largest economy, partly because they profit from
gains not only in share prices but in the currency itself.
Japanese share prices have room to grow. Companies trading
on the Tokyo Stock Exchange sell at an average of 2.1 times book
value per share -- the value of assets after debts are
subtracted -- says the TSE. That compares with 3.1 times in the
rest of the developed world.
Small Beer
Foreigners were net buyers of Japanese stocks for 27 of the
past 30 weeks, purchasing 5.7 trillion yen ($49 billion) more in
shares than they sold during the January-July period, said the
TSE, surpassing the 1991 record of 5.62 trillion yen in net
buys.
International investors see increased willingness by
companies to close plants and revamp units to boost profits.
Shares of Sony Corp., for example, have risen more than 31
percent since the world's second-largest maker of consumer
electronics announced restructuring plans in March, sparking
this year's foreign investor-led Nikkei rally. About 45 percent
of Sony shareholders are non-Japanese.
The rally ''is 'small beer' compared to where Japan could
go,'' said James Clunie of Murray Johnstone Ltd. in Glasgow,
Scotland, with $6.5 billion of assets. ''This market has been so
bad for so long that a 20 to 30 percent bounce won't stop people
from buying.'' Clunie, who raised Japanese stocks to 26 percent
of his non-U.S. international portfolio, expects the Nikkei to
surpass 20,000 by year-end.
Others say a rapid climb by the Nikkei is unlikely, though,
as ''some fund mangers, especially in the U.S., have already
shifted toward over-weighting'' Japanese shares, said Keiko
Kondo, a strategist at Merrill Lynch Japan Inc.
While 38 percent of U.S. fund managers surveyed by Merrill
in July were bullish on Japanese stocks for the next 12 months,
down from 41 percent in the previous month, Europeans are more
bullish. Sixty-one percent of European fund managers -- up from
48 percent in June -- expected a rally in Japanese stocks.
''If U.S. and European financial markets are stable, funds
will continue to flow into Japan,'' said Kondo. ''The happiest,
likely scenario is for stocks and yen to rise moderately.''
Market Forces
Hedging yen may be unnecessary for the majority of foreign
equity managers, as the yen seems largely resistant to Japan's
repeated efforts to stem its gains, now at 6 percent for the
last month.
Japan has sold yen at least seven times for nearly $30
billion total since June 10, when the nation reported growth in
the January-March period after more than a year of contraction.
The government fears that the yen's rise will impede recovery by
slowing exports and sending down stock prices of exporters.
While the first five rounds of intervention managed to lift
the dollar by more than 1.5 percent to above 120 yen each time,
the last two actions failed to push the dollar as high. The U.S.
currency has mostly fallen since then, touching a 5 1/2 month
low of 113.95 yen Monday.
''The foreign exchange market is no place for amateurs,''
said David DeRosa, president of DeRosa Research & Trading, which
manages an investment fund. The Japanese government is
''clueless at understanding market forces.''
Seeing little chance of the dollar rising more than 10
percent in the next six months, MFS Investment Management is not
hedging its currency exposure, said MFS senior vice president
David Mannheim. The company manages $7 billion of assets outside
the U.S. and devotes some 22 percent of its international stock
portfolio to Japan.
''Currency is one of the fundamentals we look at, but most
often it isn't the most important,'' said Lawrence Speidell,
partner at Nicholas-Applegate Capital Management in San Diego.
The company, which has more than $31 billion in global assets,
doesn't typically hedge its currency exposure.
Hedge or Not
To be sure, fixed-income managers are more inclined to
hedge their yen when buying Japanese bonds because they can't
take advantage of rising bond prices if the yen falls. Rising
bonds push down yields, which in turn help send down the yen,
leaving foreign investors with fewer dollars.
In contrast, many but not all equity managers care less
about currency exposure because that currency tends to
strengthen in the long run if the equity market keeps rallying.
The currency implication is ''embedded in the stock selection,''
said Speidell.
Few foreign equity fund managers plan to convert the yen
proceeds back to dollars even when they sell Japanese stocks to
take advantage of their climb, said analysts.
On July 23, the day after Federal Reserve Chairman Alan
Greenspan hinted that the Fed may raise interest rates, sending
U.S. stocks down by nearly 3 percent, some U.S. investors sold
some Japanese stocks to cover losses at home. Yet when the
Nikkei dropped 1.3 percent the same day, the yen didn't fall,
because for the most part foreigners, even if they dumped some
stocks, didn't convert their yen to dollars.
Many foreign investors ''are keeping their yen proceeds in
yen-denominated financing bills, waiting for the right chance to
jump back into the market,'' said Hidenao Miyajima, manager in
the investment strategy department at Nomura Securities Co. Ltd.
Yen Fan
International investors may be better off staying in the
Japanese stock market without hedging currencies, as the bias
right now is for the yen to rise further, analysts said.
U.S. investors who invested in Japanese stocks a year
earlier, and didn't hedge the yen to eliminate the risk it could
decline, have enjoyed a 37 percent total return in currency and
stock price gains by now. Meanwhile, Japanese investors earned
just 10 percent on the Nikkei's gains. The dollar fell more than
28 yen in the same period.
''I'm a fan of the yen,'' said Jim O'Neill, chief currency
economist at Goldman Sachs International in London. ''Supply and
demand are very powerful in the yen's favor.''
O'Neill said he expects global investors will increase
their Japanese stock holdings in coming months by about 5
percentage points -- pouring roughly 10 trillion yen into the
Japanese equity market.
''If you bet on the secure up-trend of a market, you should
not hedge the currency,'' said Christian Takushi, an equity
strategist who manages the $4.4 billion in global equity funds
at Swissca Portfolio Management in Zurich. ''Otherwise, you'll
miss some performance.'' |
