Global Macro: Japanese Equities Remain Attractive

TheStreet.com

NEW YORK (TheStreet) -- Economic data across the world continues to show weakness. Purchasing Managers Index readings in both Europe and China raised concerns over the future health of global economies, but central banks have been on guard.

The European Central Bank cut rates recently, and President Mario Draghi vowed to keep a close watch on the data. European PMI's have been below 50 for a number of months now, indicating that contraction is taking place.

China has seen a similar slowdown in economic data. The services sector as well as factory data released readings that were below expectations, and further weakness could hamper global demand.

One of the lone bright spots is the nonfarm payrolls data out of the U.S. Although the number wasn't spectacular, it did beat expectations. The volatile nature of economic data has recently shown the ability to beat expectations one month and miss by a large margin the next. With a schizophrenic market, it is prudent to remain cautious. Although U.S. equities remain the most attractive asset class, downside risks remain.

Source: Stockcharts.com

Early Tuesday morning, the Nikkei broke above 14,000 for the first time since June 2008. This was on the heels of strong employment data out of the U.S. Friday and a market holiday that caused traders to play catch-up today. Japan is a major exporter to the U.S. and with stronger data, the prospects improve for Japanese companies.


Earnings season has taken way in Japan, and many analysts have deemed it disappointing. Of the companies that reported, only 54% beat expectations. That is compared to a rate of 68.5% in the U.S.

"Abenomics," is the term coined for Japan's aggressive monetary and fiscal policy, made popular by Shinz�� Abe, the current Prime Minister of Japan. The policy diminished the value of the yen by 24% and incited a 62% rise in the Nikkei index. Although the yen reached a psychological resistance against the dollar, proving unable to push past the 100 dollar/yen mark, the long term trend remains bearish yen.

The chart above is of MAXIS Nikkei 225 Index ETF over Vanguard Total World Stock Index ETF . The pair shows the relative strength of the Japanese equity market compared to world equity markets. The Japanese market alongside U.S. equities, remain the most attractive investable assets across the globe. Both have long term uptrends and show little sign of overhead resistance. Until investors begin showing irrational exuberance, pushing prices to unjustified levels quickly, both markets should continue with steady inclines.

Source: Stockcharts.com

Warren Buffett came out Monday exclaiming that our low interest rate environment makes fixed income a poor investment. Although equities are very attractive, the lack of domestic and worldwide inflation concerns make high yield bonds appealing. With interest rate risk low, and a stabilizing economy, high yield credit is a viable option.

The chart above is of SPDR Barclays Capital High Yield Bond over Pimco Investment Grade Corporate Bond Index Fund . This pair highlights the strength of yield seekers in the market. The pair recently broke out of a resistance range, following equities to new highs. Further improvement of the risk environment and tampered risk of rising interest rates should propel this pair even higher.

Source: Stockcharts.com


The last pair is of iShares Dow Jones Transportation Average Index Fund over SPDR Dow Jones Industrial Average . This indicator has been used by analysts for a long time to determine the strength of rallies. The story goes that if the transport index outperforms industrials, then companies are shipping out product, which should show up in the earnings. Although factory output has been unimpressive, this pair looks to have found a near term bottom. A rise in the indicator should give further strength to the equity rally we are immersed in.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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