Brokerage sector
UPGRADE RATING
Will history repeat itself!?
■  Upgrade sector to OVERWEIGHT ahead of anticipated rebound: We
upgrade our view for the brokerage sector from Market Weight to
OVERWEIGHT. While sector fundamentals are dismal with the prospect of
steep 3Q losses and the possibility of losses lasting into FY3/10, assuming a
continuation of current difficult market conditions, we adopt a more bullish
sector view in light of the many similarities between the market downturn
from the past few months and four of the five rebound phases for the
securities sector seen over the past 20 years.
■  Bottoming out suggested by past trends: We find similarities in the
following six areas: (1) a correlation coefficient between the brokerage
sector relative performance against TOPIX and TOPIX near 1 (0.8+ in
general) just before past rebounds, (2) share-price bottoms before credit
spread weakness ends in three of the past four rebounds, (3) monetary
easing during the past four rebounds, (4) margin long/short multiple decline
to the same level as the past four rebounds, (5) bottoms at the weakest point
for profits and other business conditions in the past rebounds, and (6) shareprice
rebounds when P/B premium for large securities companies over the
TSE average slipped to nearly zero in two of the past four rebounds.
■  Stock selection: We upgrade our ratings from Neutral to OUTPERFORM
for Daiwa Securities Group, Nomura Holdings, Monex Group, and kabu.com
Securities. Our top pick is Daiwa on the prospect of reduced risk. We prefer
kabu.com Securities among the online securities companies. Positives are
low BPS erosion risk at Daiwa with the exit strategy for its private-equity
investment in Sanyo Electric and earnings stability, including short-term
earnings, at kabu.com Securities. However, investors with higher risk
thresholds could be attracted to Nomura and Monex after the sell-offs over
the past few months.
■  Steep losses in 3Q: We expect steep 3Q losses from the securities sector
that are likely to be the short-term bottom. There is also no evidence of a
genuine earnings recovery in 4Q. Although sector share prices could remain
weak over the next 2-3 months in reaction to the hefty 3Q losses, investors
need to purchase brokerage sector stocks during this type of phase to earn
attractive returns if history repeats.