Friday, 30 November 2012

Guy Foster: Week in review – land of the re-rising sun?

Prime Minister Abe. Source: Wiki
As we arrive at the end of November 2012, it is Japanese equities which have been the stand-out performer of the month. The current excitement surrounds former (and future) Prime Minister Shinzō Abe and his monetary reformist zeal. On the one hand investors should hold off: Abe, personally is well-liked by the electorate with 40% of the popular vote, but regrettably for Abe and Japanese equity bulls, those figures are irrelevant as his party, the Liberal Democratic Party, is likely to attract around a quarter of the vote – which means they will be trying to construct a coalition.

The Restoration Party and more will likely be require d to bring Mr Abe a ‘stable’ coalition and the prospect of total political stagnation could weigh on equities in the short term. Longer term, the basic trend of a weaker yen, which pre-dates the current election-related shenanigans, has continued and paves the way for a more attractive environment for Japanese equities (albeit at a glacial pace).

Over the course of November it remains the Japanese Topix index which tops the tables with a rise of 5.8% (and a yen which has fallen 3.5%). For now though, the equity market is taking a break from the euphoria. Japanese equities rose 0.8%, lagging the Italian, French and German markets which blazed the trail this week.

In the world of forex the euro is back in the ascendancy, crossing $1.30 for the first time in a month. The underlying fundamentals of a current account surplus (this is one of the few regions which exports more than it imports) and monetary discipline (despite the Bundesbank’s anxiety, the ECB remains the most conservative of monetary institutions) supports the unloved single currency.

Consistent with the theme of a stronger euro was a strengthening in the Spanish, Italian and Portuguese bond markets. These markets rallied hard, anticipating the latest Eurogroup deal. As Mike said: an Odyssey ends – for now.
                                                                                                                                    
Guy Foster
Head of Portfolio Strategy

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