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Jeff Saut: Six Reasons to Get Bullish on China & Japan


Looking to Asia for a sustainable recovery.

The second thing that leaped out at me while studying the Forbes list was the increasing number of people making the list from the emerging market countries. Places like Brazil, China, Russia, Malaysia, Argentina, etc. This is in keeping with my theme of investing in the emerging and frontier markets.

To be sure, while the US recession is abating, the country most likely to pull the world out of recession is China. China's manufacturing surveys suggest its recovery is sustainable, China's output is at the year's high as overseas orders are at an 11-month high, the Chinese government's subsidies have helped its auto makers (record sales in June), the export tax cut is becoming impactful, new loans are surging -- and the list goes on.

That being said, one of the best indicators on the short-term direction of the Chinese stock market has been the 25-day moving average (DMA) juxtaposed with the 50-DMA. Back in March, the 25-DMA crossed above the 50-DMA, which was a buy signal, and the rally from there to the June top encompassed 65%.

While the 25-DMA hasn't currently crossed below the 50-DMA, the Halter USX China Index (HSX) has knifed below both of those moving averages, and is consequently negatively configured in the short-term. I am therefore cautious.

I have, however, become increasingly intrigued about investing in Japan since my visit to the astute GaveKal organization. Reinforcing that view was Credit Suisse's recent upgrade on Japan. To wit:

1. Japan is a late-cycle play. It typically starts to outperform 4 months after the trough in lead indicators. I believe this is because Japan is a high-cost producer and has the economy that is closest to deflation globally.

2. Japan industrial production (IP) has had a beta of 3 with global IP. Both the economic surprise index and purchasing managers' indexes (PMIs) are recovering more strongly in Japan than elsewhere.

Japan's heavy-manufacturing bias (manufacturing as a share of GDP is 21%, versus 13% for the US) means that Japan should be particularly sensitive to the global inventory rebuild that has considerably further to run. As a result, relative earnings momentum is improving.
No positions in stocks mentioned.
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