Terrible times for global markets (page 2 of 2)

This weakened outlook may cause more earnings estimates downward revisions in the short-term. However, attractive valuation may offer some support to the markets going forward. According to Bloomberg, the DJ Euro Stoxx index (Eurozone) trades at 16x estimated 2002 EPS.


Japan

Long-term credit, regional, and city banks sold a net JPY970 billion between April and the first week of September. At this pace, the banks might fall short of their planned annual sales of cross-shareholdings of JPY4.8 trillion.

Overall, the BOJ plan to purchase bank stocks directly from banks should diminish the negative supply impact on banks crossshareholdings sales. Therefore, the market's supply/demand position should improve in coming weeks. It is expected that Koizumi's administration will respond positively to BOJ's decision by speeding up bad-loan disposals. Comprehensive measures are expected by the end of October.

For long-term value investors, Japanese stocks appear attractive on a dividend yield basis. Although the simple average prospective dividend yield for the First Section of the Tokyo Stock Exchange is only at around 1.1%, the real yield is among the highest in global markets given Japan's negative inflation and extremely low interest rates. In the past 12 years, the dividend yield has exceeded 1% on three previous occasions, in 1998, 1992 and 1995. The stock market bottomed out on all three occasions.

Compared to the benchmark bond yield, the relationship appears even more extreme. When dividend yield was last at this level, in 1992, JGBs yielded 4.8-5%. Although corporate profits and economic outlook are weak, the possibility of massive
dividend cuts should not be big (except bank) because
companies have paid out only a modest amount of net profit as dividend in the last 10 years and have been under
pressure to increase their payout ratio.