This content is from: Home
2011 All-Japan Research Team: Recovery Slowed, But Not Stopped
As Japan struggles to return to normalcy amid the destruction and uncertainty, equity analysts have been busy assessing the disaster’s economic impact as they provide investment insight to clients. Japan will recover from disaster, analysts say — and investment opportunities abound.
Before the devastating earthquake, tsunami and nuclear crisis shattered the country on March 11, Japan appeared to be well on the way to economic recovery. Last year the nations real gross domestic product grew 3.9 percent the fastest among the Group of Seven industrialized nations and exports increased for the first time in three years, surging 24.4 percent year-over-year.
We are bullish on Japanese equities right now, Jun Konomi, director of Japanese equity research at Nomura Securities Co., told Institutional Investor in mid-February. Emerging markets, which performed very well last year, are now in danger of inflation, and interest rates will hike eventually. Here in Japan we enjoy a combination of earnings growth and very low interest rates, with abundant money temporarily moving away from emerging markets, which should push up Japanese equities.
Just a few weeks later, the mighty temblor one of the most powerful ever recorded, measuring 9.0 on the Richter scale convulsed the region and spawned a 30-foot tsunami that killed thousands and wiped entire communities off the map. Explosions and a partial meltdown at the quake-damaged Fukushima Dai-ichi Generating Station in northeastern Japan have kept the country and the world on edge, fearful that radiation leaks will worsen and contamination will spread.
As the country struggles to return to normalcy amid the destruction and uncertainty, equity analysts have been busy assessing the disasters economic impact as they provide investment insight to clients. Each year II asks money managers to weigh in with their opinions on which of these analysts do the best job of covering Japanese companies, and the winners are inducted onto the All-Japan Research Team. Polling for this years survey, our 18th annual, had already concluded and the results tabulated by the time disaster struck.
BofA Merrill Lynch Global Research catapults from No. 11 to share the top spot on the 2011 All-Japan Research Team with returning champ Nomura; the firms each capture 24 total team positions. UBS, with 18 positions (three fewer than in 2010), holds steady in third place. Daiwa Securities Group, which tied for No. 1 last year, tumbles to fourth place after losing nine positions; it wins 15 spots this year. Rounding out the top five is Citi, which holds the same rank and the same number of team positions 13 as it did in 2010. Results are based on responses from nearly 1,000 investment professionals at some 270 institutions that collectively manage an estimated $1 trillion in Japanese equities.
Profiles of the top-ranked analysts in each of the surveys 31 sectors appear in the pages that follow; profiles of analysts in second and third place, along with deeper data, can be found on our web site, institutionalinvestor.com. Please note: Reporting on the sector profiles was completed before the March 11 Tohoku earthquake.
BofAs spectacular advance may seem surprising, but its in line with the banks plan to be Japans top foreign brokerage, according to Yohei Osade, director of Japan research. BofA is virtually the only firm thats been building up its business in Japan in recent years, he notes. Last April, Osade announced that he intended to expand his research departments coverage universe by some 13 percent, to 360 companies, by December 31. He came close: By the end of last year, BofA researchers were tracking 340 stocks, up from 316 at the time of Osades declaration. The firm employs 32 analysts one more than last year and 13 of them appear in the runner-up position in this years survey. In fact, BofA more than triples its number of runners-up, and that helps fuel the firms remarkable rise.
When a place weight is assigned to each position, however, Nomura clearly outperforms all rivals (see Weighting the Results). The Japanese firm also increased the number of stocks its analysts cover, from 587 to 605, despite a net loss of five researchers, to 61, to BofA and other competitors. Poaching has been rampant, Konomi says, and has led to a change in the geography of equity research in Tokyo.
That change is evident in the strong gains made by two firms: Deutsche Securities bolts from ninth place to tie for sixth with Morgan Stanley MUFG Securities Co., which shared 11th-place honors last year with BofA.
Global investors are taking another look at Japan, Orlando Faulks, Deutsches head of Japanese research, told II in February. Stocks look cheap in Japan right now, particularly because a large proportion of listed firms are industrials. Those firms are particularly sensitive to any increase in sales, which should cause profitability to rise disproportionately.
In response to renewed investor interest, the German bank has been hiring star analysts among them Masao Muraki, who joined the firm in September from Daiwa and is this years top-ranked researcher in Insurance and increasing coverage. Deutsches 23 analysts currently follow 220 stocks, and Faulks expects to add a whopping 90 more this year.
Yet another Western bank sees incredible opportunities in Japan and is repositioning itself to capture a bigger portion of that market. In May, New Yorkbased Morgan Stanley formed two joint ventures with Tokyos Mitsubishi UFJ Financial Group: Morgan Stanley MUFG, which primarily serves global and institutional investors, and Mitsubishi UFJ Morgan Stanley Securities Co., which focuses on domestic investors (and ties for ninth place). The firms, including their equity research departments, operate independently.
Stefan Pendert, who was named head of Japan research for Morgan Stanley MUFG in November, notes that before the joint ventures, Morgan Stanley Japan employed 28 analysts; he has since increased that number by four and ramped up stock coverage from 249 companies to 284. Japan, he said in February, continues to be a critically important market in our global equity strategy.
Has that attitude changed since March 11? Not at all. A mere ten days after the twin natural disasters and even as the Fukushima nuclear crisis was still unfolding, Penderts team published a report, Tohoku Earthquake: First Assessment, in which each analyst was asked to assess the short- and long-term outlook for his or her sector. While noting that it is far too early to grasp the full implications of the tragedy, Pendert told clients to expect a short, sharp downturn, followed by a U- or V-shaped recovery and reminded clients that every dip is a dip to buy.
Nomuras chief strategist arrived at a similar conclusion. Although we expect this earthquake to provide further impetus to the correction in Japanese equities that has been occurring since mid-February, we do not envision a serious correction, Seiichiro Iwasawa stated one week after the disaster. We think the intraday low Nikkei average: 8,227; Topix: 725 on March 15 is likely to have been the bottom for Japanese stocks.
Put another way, researchers are convinced that Japan is ready to bounce back, and investors that share their optimism can find reliable guidance through the recovery from the analysts on the 2011 All-Japan Research Team.