Byron Wien: Think again about Japan

Jody Clarke talks to Byron Wien about his top ten 'surprises' for 2010, including big comebacks for the dollar and Japan.

With its huge debts, how can the US economy hope to grow by more than 5% this year?

Well, firstly, that's part of the way it improves. Only a small part of the US stimulus programme has been spent about 35%. We'll spend the rest this year.

Secondly, the real thrust for the economy is that it went down so hard. The real GDP decline was 3.9%. Historically, when you fall that far, the year after you start to recover usually pretty strongly. The recovery began in the second quarter of 2009 and got off to a slow start. But I think it'll be stronger this year.

Look at three important aspects of the economy. Capital expenditures are coming back. Initial unemployment claims are turning down. Usually you don't get a positive employment report until nine months after the economy troughs. So the first quarter of 2010 will be the first quarter that you'd expect to see a positive employment number.

The third thing is that inventories are being rebuilt. So if you have capital expenditure picking up and employment improving, I think the US economy could surprise most people.

But is a recovery already priced in?

I think the market is ahead of the economy. The market could reach 1,300 on the S&P 500, but point to point, December to December, I think it will be a flat year because the market is ahead. To my mind, it'll be tough to make money in America and Europe. But the market that will surprise is Japan.

Why are you bullish on Japan?

You could interview 100 people and you wouldn't find too many positives on Japan. Nearly everybody is negative on it. But I think things are improving there. That's an important positive. Exports are improving and the yen is weakening, which should in turn improve exports further. Real GDP declined by 10% in the first quarter of 2009 and only three-tenths of 1% in the third quarter. It's a negative number, but it's getting better.

The point with Japan is that things don't have to get good, they just have to stop getting bad. And if they do, the sentiment on that market is so negative that the market could do better. China continues to do well and Japan is a clear beneficiary of that fact. I have a target of 12,000 on the Nikkei.

You reckon another potential surprise in 2010 will be a stronger dollar. Why?

Most people are negative on the dollar. I think it's cheap on a purchasing power parity basis [which adjusts for differences in price levels between countries]. So I think it could go up 10% against the yen and the euro.

How do you go about picking your top ten list?

These are probable events, not sure things. The events on my list of surprises are ones that nobody else would give more than a one in three chance of taking place. But I reckon they have a better than 50% probability.

A good surprise is something like Japan, as it departs completely from the consensus view. If you're just a little bit further out on a limb than the average person, that's not good enough. I didn't use gold, China or oil this year as I was concerned my view was not a surprise. It was just the continuation of an existing trend.

You also think that things are going to change in Iran?

The economy is in very bad shape and the Iranian people are focusing on it. They know what's going on in the world. And they feel that pursuing the nuclear policy and their hostility to Israel is a liability.

President Ahmadinejad is a liability and will be removed. I don't think Iran's nuclear policy will change much, but it will become more open to negotiation with the West.

Who is Byron Wien?

Each year for the past 25 years, Byron Wien, 79, has published his views on ten potential surprises for the year ahead. The former chief investment strategist for Morgan Stanley was never more right than in 2009. He said the gold price would hit $1,200 an ounce, oil would touch $80 a barrel, and Chinese growth would exceed 7%. He also said stock prices would soar and, indeed, the S&P 500 rose to 1,115 not far off his 1,200 prediction. This year he sees a strong US recovery, with growth hitting 5%, unemployment falling to 9%, and the Federal Reserve hiking interest rates. Yields on ten-year Treasuries will rise above 5.5% as some foreigners become reluctant to buy US debt, while laws favouring nuclear power will be endorsed by President Obama, with Congress passing bills providing loans and subsidies for new plants.

Wien was brought up in Chicago and was orphaned when he was just 14. "It made me very self-reliant. I was basically on my own, so I went to work after school because I had to make my own money." He got work at the Pabst Brewery as an office boy. He later went to Harvard, majoring in physics and chemistry, before going to Harvard Business School. He went on to work with Morgan Stanley, staying for so long that he was dubbed "Byronosaurus Rex". He now works for private-equity house Blackstone Group.