Bank of America Merrill Lynch - "Japanese equities have been very strong in recent weeks. The NKY rose from 8,660 in mid-November to over 10,000. This has gone hand in hand with expectations for reflationary policy and a weaker yen. FX Strategist David Woo warns that there is some short-term risk, as a lot of positioning has been based on a weaker yen. But Japan continues to be one of our favored contrarian trades. Following the recent LDP victory, we expect to see fiscal stimulus and a new BoJ governor with a 2% inflation target.
Japan is the ultimate anti-deflation trade. Reasons to buy Japan: a weaker yen is good for stocks; the FMS allocation to stocks in the region recently fell to a 3.5 year low; stocks in the region are 50% cheaper than other DM; Japan is just 7% of the global equity market—down from 44% in 1988.
Another area of the market that is very unloved according to the FMS is resources. Even though EM equities appear to be overbought according to our fund flows, EM resources are another potential contrarian trade for 2013, particularly given the increase in Chinese growth expectations. Note that historically, when more than 50% of EM fund managers have reported underweight positions in to Materials, it has marked a turning point for the sector’s relative performance to MSCI EM."