During the 1980s and 1990s, market crises tended to start in emerging markets, like the Russian debt crisis in 1998. However, the world has changed dramatically since the hi-tech bubble burst in 2,000.By 2008, emerging economies (Africa, Central/Eastern Europe, Commonwealth of Independent States & Mongolia, Developing Asia, Middle East and Newly Industrializing Asia) will account for approximately 25% of world GDP, versus 26% for the US. Moreover, these economies (excluding newly industrializing Asia) in aggregate have grown 14.8% PA, versus 5.4% PA growth for the US.What this means is that, economically, the world no longer catches pneumonia when the U.S. sneezes. For investors in Japanese stocks, this is a crucial point. Merrill Lynch estimates that developing countries in Asia, the Middle East, Latin America and Africa will spend $1.25 trillion on roads, airports and other infrastructure projects in three years, as exemplified by the building boom in China ahead of the Beijing Olympics.Thus demand for basic materials, ships to carry these basic materials and construction equipment to build this infrastructure will remain strong for the foreseeable future.
For Japanese stocks, the incoming liquidity tide will not lift all boats by equal measure. Since falling Fed Fund rates will be most beneficial for commodity prices such as gold and oil as well as emerging (BRICs) markets, the focus remains on those Japanese stocks with the highest exposure. As far as "domestic" plays go, we vastly prefer real estate stocks over the megabanks. After our September 10 "Japanese Property: Fear Overcomes Greed" comments, Japanese property stocks have rebounded smartly, as have the banks. However, we see competition in domestic banking intensifying even further with the privatization/liberalization of Japan Post. Moreover, we doubt another rate cut before March 2008 will significantly boost bank loan-deposit spreads.