Big Bank Offerings Will Weigh on Japanese Equities    

• The S&P 500 is already back to new rebound highs after a very brief pullback, and the USD index has renewed a new post-crisis low, with some 6% more downside to the secular low of 70.70 in March 2008. Crude oil and industrial metals like copper however are beginning to de-link from the bounce in stocks, perhaps as incremental hot money flows into surging gold, which to us is looking more like a bubble.
• The IMF, World Bank and other international agencies continue to upgrade their forecasts of ex-Japan Asian growth, which should continue to support better performance in the region�fs equity markets as well as currencies. Thus as long as US stock prices continue to maintain positive bias, Asian markets should continue to provide better performance alpha.
• While the apparent rapid increase in the USD carry trade is of concern, this concern could be overstated, if, as Barclays Capital believes, market volatilities have so far discouraged hedgies from stampeding into the carry trade.
• In terms of the pace of economic recovery in 2010, it is generally recognized that the US and Japan will lag the global recovery. So far this has not been a major impediment to US equities, but is a major factor along with the strong yen and continued weakness in exports a factor for Japanese equities, as Japan is expected to recover only 1%-plus growth after experiencing the deepest recession in the postwar period in 2009. 
• Japanese equities are already among the cheapest on a book value basis, but the value trap remains that there is a dearth of top line revenue growth. Japanese companies are clawing their way back to profitability by literally squeezing blood out of a turnip, which in turn is depressing domestic consumption and exacerbating an already very bad national debt trajectory due to declining tax revenues.
• The lag in Japanese equities represents a return opportunity cost to global investors even as global stock prices drag up Japanese prices up with them. In this light, the heavy capital calls expected by the megabanks in the next few months will be a heavy weight on the Japanese benchmark indices.

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