July 2010: Focus shifts to the US economy, yen strength

- "Pullback in European shares has been modest — In June, the S&P Global Equity Index retreated 3.6%. Emerging economies were down 0.7% and Europe was down 2.3%. In continental Europe, movements were minor: Germany was down 0.1%, France 1.1%, and Italy 0.8%, while Spain was up 0.2%."
- "Pullback in US equities sharp — Germany and other eurozone countries benefit from euro weakness. Japan and the US were relatively big fallers in June, retracing 4.3% and 5.5%, respectively. We see the focal points on the equity market as moving to unease about the US economy and yen strength rather than the Greece crisis."
- "US long-term interest rate falling fast — It has fallen 1.06ppt, from 3.99% on April 5 to 2.93% on June 30. Japan’s long-term interest rate has fallen only to 1.09% from 1.38% over the same span, so the interest-rate gap between Japan and the US has narrowed 77bps, which we regard as one cause of yen strength and dollar weakness."
- "Downside to where? — TOPIX plunged to 811.01 at the time of the Dubai turmoil last November (down 16.9% from its high three months before). TOPIX is currently 15.8% off its April high. A break below 811.01 would mean no obvious targets for a bottom until the March 2009 low of 700.93."
- "Investment strategy — We expect the uptrend in share prices to continue. We highlight makers of consumer goods that stand to benefit from a rising renminbi. With the government emphasizing fiscal discipline, we think it could push deregulation in tourism, real estate, and telecoms as economic growth measures. Domestic-demand stocks are likely to benefit substantially."
- "Beneficiaries — We think beneficiaries of current trends include Sumitomo Realty & Development (real estate), a play on the Basic Urban Strategy Law, ANA and Central Japan Railway (transportation), likely beneficiaries of moves to nurture the tourism industry, Komatsu (machinery), a global infrastructure investment play, and Unicharm (toiletries), a core China-related name."
Citigroup Japan Portfolio Strategist 20100701