Fresh support for domestic economy

ON JAPAN

In early June global risk aversion led the Topix index to its lowest level since December 1983, suggesting the Japanese stock market faces a bleaker outlook now than at the depths of the financial crisis in 2008, and in the aftermath of last year's horrific earthquake and tsunami.

We believe the outlook being implied in the current valuation of selected Japanese equities is far worse than is likely. Japan’s domestic economy is performing well, supported by reconstruction spending, with consensus estimates for 2012 GDP growth of around 2%, well ahead of those for the UK and Europe and modestly stronger than the US. Consumption has been the primary driver of domestic growth, with analysts calculating net exports only accounted for 0.5% of the 4.7% GDP growth achieved in the first quarter of 2012. Looking ahead, we expect the improvement in the domestic Japanes...