Japan stocks to outperform despite fall: economist
The economist who warned that Wall Street stocks were overvalued just before the dotcom crash says Japanese stocks are better placed than other markets
"Despite the sharp fall on May 23 we expect Japan to outperform other G5 stock markets, partly because only in Japan are profits this year likely to rise," Andrew Smithers, the author of "Valuing Wall Street," wrote in his latest research note.
The fall in the Nikkei, which plunged more than 7% last Thursday, was partly due to the poor data in China, with the HSBC flash PMI sliding into contraction territory for the first time since October.
"Weakness in China has more immediate impact on Japan than on other G5 countries, but it is a general problem for the world economy which will be offset for individual countries by the extent of the weakness of their real exchange rates," Smithers said.
He also noted that corporate selling has fallen while foreign buying into Japanese companies has been rising.
Smithers assumes that companies were "eager sellers" in the year to end-March 2013 to offset poor profits from operations but that they will have less incentive to do so this year as their profits should be robust without capital gains.
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He predicts that net corporate cash flow in Japan will rise this year due to an improved current account surplus because of the weakening of the yen, a rise in the fiscal deficit and if the household savings' rate falls or housing investment rises.
"We do not expect corporate investment to fall significantly, so the rise in corporate cash flow should be fully reflected in rising profits," he said.
Stocks in the eurozone are "probably less overvalued than US ones" but profits of companies in the single currency area are likely to fall because of weak economic growth, according to Smithers, who believes the chances of the eurozone breaking up are over 50%.
"Japan therefore looks the better prospect," he said.
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