Scanning the globe for investment
destinations can be a daunting task. When it comes to stock markets, however,
relative strength analysis serves a useful purpose of highlighting under- or
outperforming markets (or individual stocks) at a glance. Having perused a bunch
of these charts, the Japanese situation stands out as being of particular
interest.
Firstly, let’s look at the long-term
chart of the Nikkei 225 Average. Japan’s stock market had an extended multi-year
rally that started in earnest in the 70s and accelerated sharply in the 80s. The
Nikkei peaked on December 29, 1989 at 38,915. During the devastating
deflationary period that ensued the average dropped by a massive 80.5% to 7,607
on April 28, 2003. The Nikkei staged a recovery from 2003 until 2007 when the
sub-prime fallout came into play.
Source: I-Net Bridge
Putting the Nikkei 225’s performance in
perspective makes for interesting reading, as shown by its relative performance
compared with the S&P 500 Index in the chart below. A falling line, which
was the case until the end of 2001, depicts Japanese stocks underperforming
American stocks. Over the period 2002 to 2008 the relative performance of the
Nikkei 225 and S&P 500 mapped out a broad sideways pattern.
Source: I-Net Bridge
Zeroing in on the shorter term, the
Nikkei 225 has underperformed the Dow Jones World Index since the beginning of
2006, underperforming a basket of developed stock markets by 43% until the
middle of March this year. But the tables seem to have started turning over the
past three months as indicated by the relative strength graph (bottom section)
in the graph below.
Source: StockCharts.com
Being cognizant of the fact that we
have seen a number of false starts on the relative chart over the past six
years, which factors might result in Japanese stocks maintaining their
outperformance? David Fuller (
Fullermoney) argues that there are at least two:
1. Japan is the most efficient user of
oil (although Germany is probably a close second).
2.
