Nomura's Individual Investor Survey for February

The results of Nomura’s Individual Investor Survey [pdf] for February show a reverse in sentiment with the first upswing in bullishness in four months.

Individual investors seemed to be buying into the Nikkei's rally above 17,000, but the N225 is facing resistance above 17,500 and could test the psychologically important level of 17,000. (See chart below)

Last month I noted that after reviewing Nomura’s I-View Index (a gauge of indiv. investor sentiment associated with its monthly surveys) for the past ten months, it looked like almost every time individual investors were low on optimism, stocks actually rallied. And just as investor sentiment improved for this month's Nomura survey, the Nikkei has stalled somewhat, losing its upward momentum.

Despite the improvement in sentiment, I have a gut feeling that Japanese individual investors and even institutional investors remain "cautiously optimistic" about domestic stocks. The underlying investment theme in Japan is still to find yield (overseas bonds and currency deposits) -- for obvious reasons -- and I think there's too much trend investing (China and India) instead of investing in one's own backyard.

See more of my thoughts at the end of this article, following a summary of the February survey.

Some takeaways from the latest Nomura survey include:

Most Appealing Sectors:
(Unchanged from last month)

• Pharma & Healthcare
• Autos & Auto Parts
• Materials

Least Appealing Sectors:

• Construction & Real Estate
• Resources
• Electricity & gas (replaced 'Financials')

Most-watched Stocks:

• Toyota (TM)
• Sony (SNE)
• Nippon Steel (JP: 5401)
• Tokyo Electric Power (JP: 9501)
• Japan Airlines (JP: 9205)
• Oriental Land (JP: 4661)
• Kagome (JP: 2811)
• Nintendo (NTDOY.PK)
• Mizuho Fin. Grp. (MFG)

*ADR honorable mentions:
• Canon (CAJ)
• Honda (HMC)
• Nippon Telegraph & Telephone (NTT)
• Sharp (SHCAY.PK)
• Nissan (NSANY)
• NTT DoCoMo (DCM)

My Comments:

I feel the current market is rather tricky and unfavorable for foreign individual investors. Buying Japan index funds at these levels could be the wrong move, for instance if there is a U.S. market correction (or even one in China, although one can argue investment funds allocated to China could subsequently flow into Japan; but it will depend on the size of a U.S. correction and if it is simultaneous, say with China) that induces selling in Japan. Foreign portfolio investment capital continues to be key to starting and sustaining rallies even today in Japan.

Also, sticking with blue chips (meaning exporters and banks) could be the wrong move due to further possible weakness in the yen (which is indeed good for exporters but limits gains (exacerbates losses) for ADR/Japan ETF holders). Treasury Secretary Paulson came out a few days ago and said he believed in market forces and was unaware of any Japanese government intervention in the forex market.

Yesterday a BoJ official said the weak yen is helping Japan's economy (but overseas competitors such as in the U.S. auto industry are complaining it's an unfair advantage). I still think a February BoJ rate hike is unlikely (thus my current disinterest in bank stocks). We'll see what happens at the G7 meeting.

Disclosure: The author owns iShares Japan call options. The author is not long/short any stocks mentioned in this article.