Strategy: As the Nikkei Threatens to Break Out – What Stocks to Focus On?

So far in 2017, Japanese equities have been involved in something of a tug-of-war. The oscillation in the yen / dollar has impacted on market direction; yet with each oscillation, there has been a steady creep forward; Topix is currently up 3.5% year-to-date in yen terms, and 5.0% in dollar terms.  

That the market is up despite:

1. The dollar having started the year at 117.55 and is actually down slightly as of March 10th, to 115.39, and
2. The fact that foreigners have sold US$5bil of Japanese shares this year, serves as a reminder that Japan is enjoying something of a “Goldilocks” situation.

The economy is moving forward, courtesy of exports and capex spend. It is not yet overheating, even though the labour market looks tight, as wages are still being kept under control. Likewise, Japanese bond yields, unlike US treasuries where 10yr yields are at their highest since early 2014, are pretty stable, and since early December have been at just under 0.1%.  
However, tugs-of-war rarely maintain this steady net gain approach. Rather, you hit an inflexion point and after that you tend to go one way, rather rapidly. Assuming that the Japanese stock market does break out, we discuss what sort of stock selection policy is in order and we identify a number of companies that stand out as winners. However, there is one stock which encapsulates all of the positives we are looking for...read on for more details…