Japan Stocks Preferred by Credit Suisse; U.S. Reduced

(Bloomberg) -- Japanese equities should outperform stocks from any other region because they are the most likely to benefit from a pickup in global economic growth, said Credit Suisse Group AG, which downgraded U.S. stocks. Japan’s shares were raised to 25 percent “overweight” from 15 percent “overweight,” according to a report dated today by London-based analysts including Andrew Garthwaite. U.S. equities were reduced to 5 percent “underweight” from “benchmark.” The terms “overweight” and “underweight” refer to the representation of a region’s stocks in MSCI benchmarks, Credit Suisse said.

“Japan is our preferred play on the global recovery: it typically starts outperforming four months after the trough in lead indicators,” Garthwaite’s team wrote. In the U.S., “valuations look marginally stretched relative to developed markets.”

The MSCI World Index added 0.4 percent to 1,081.43 as of 6:56 p.m. in Tokyo. The gauge has climbed 18 percent this year as investors speculated government stimulus policies will revive the global economy. Japan’s benchmark Nikkei 225 Stock Average has advanced 19 percent in 2009. The U.S. Standard & Poor’s 500 Index added 13 percent through yesterday.

The Credit Suisse analysts lowered the Asia excluding Japan region to 15 percent “overweight” from 20 percent as valuation premiums to developed markets increase. Recommended holdings of stocks in the U.K. and emerging markets were reduced. European stocks were upgraded to 5 percent “underweight” from 20 percent “underweight.”

Government Stimulus
Governments have spent more than $2 trillion to pull the global economy out of the worst slowdown since the Great Depression. Countries including Japan, Germany and France returned to growth in the second quarter, while expansion in China accelerated last quarter after slowing for eight periods.
“China has to start tightening at some point and this has usually been less good for equity markets,” Garthwaite’s team wrote.

The boost to Japan’s weighting comes on the heels of a landslide victory in national elections for the Democratic Party of Japan, which unseated the Liberal Democratic Party from power for only the second time in 50 years.
The DPJ “could provide a catalyst for a new group of politicians not backed up by traditional vested interests to tackle some of the major macro-economic and corporate problems,” the strategists wrote. Those problems include low workforce participation rates by women, an overregulated economy and low regard for shareholders, according to the report.

Credit Suisse retained its overweight stance on Asian markets despite historically high price-to-book and price-to- earnings ratios because “if any region is likely to reach to bubble-like valuation levels, we believe it is” Asia, they said. Companies on the MSCI Asia Pacific Index, which includes Japan, are priced at an average 24 times estimated profit, up from 13.7 times at the end of 2008. The S&P 500 Index is valued at 17.1 times, 16 percent higher than the level at Dec. 31.