After Japanese stocks capped their best three weeks since 2014, investors see plenty of reasons to believe the rally will stick.
A resurgence has sent the Topix index to within 5% of a bull market, recovering most of the losses after the Bank of Japan moved to negative interest rates. Eight industry groups, from banks to shippers, have climbed more than 20%, helping make Japan the world’s best-performing developed equity market since February 12.
Bulls say this will continue as the US economy strengthens, the yen falls and government investors such as the giant pension fund pile into shares. They also point to short covering and bargain hunting after the sell-off earlier this year. While bears recognise the positives, they say state support for equities won’t be enough to stop a rout if sentiment turns.
“The rally looks sustainable,” said Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors Ltd, which oversees about $118bn. “As investors’ fears of a global recession continue to recede, the yen should start to weaken and that should help boost profit expectations for Japan.”The outside factors that whipsaw Japanese stocks have suddenly turned favourable. The US economy has seen better- than-expected data on manufacturing and quarterly growth. The Standard & Poor’s 500 Index capped a third week of gains Friday as investors shook off data showing a decline in wages to focus on a surge in hiring. Meanwhile, Chinese equities have calmed and oil has finally started recovering. All of this has helped stem a surge in the yen.
“People a week ago were seriously contemplating there being a recession in the US,” said Stefan Worrall, director of Japan equity sales at Credit Suisse Group. “The one sure thing we’ve seen since the end of February is that the US economy is beating expectations.”
That’s not all, according to Kenji Abe, chief equity strategist at Bank of America Corp’s Merrill Lynch in Tokyo. Closer to home, Japan’s $1.2tn Government Pension Investment Fund probably needs to purchase at least ¥4tn ($35bn) in local equities to get back to its asset targets after the rout, he said. Trust banks, seen as a proxy for retirement funds, have been net buyers for 14 straight weeks and Abe isn’t the only one who expects that - and other forms of domestic support - to continue.
Jesper Koll, who heads WisdomTree Investments’ business in Tokyo, says Prime Minister Shinzo Abe will “do whatever it takes” to boost growth and share prices. Abe will want to avoid embarrassing losses at public pensions after he pushed retirement managers to dump bonds for equities, he says.
“One reason for why ‘Team Abe’ is coming out with hints of more stimulus is the rising performance pressure,” Koll said. “If these new ‘national model portfolios’ do indeed show negative returns in the current fiscal year - which concludes March 31, 2016 - there are bound to be significant negative repercussions.”
Abe is considering a ¥5tn extra budget before summer elections, TV Asahi reported last month. The premier also suggested poor performance in the stock market might cause him to delay a sales-tax increase planned for April 2017.
Some of the gains in the past three weeks have been down to investors covering bearish bets. The short-selling ratio on the Tokyo Stock Exchange rose to 43% at the start of last week, near the highest in data going back to 2008.
Others came from investors picking up bargains after valuations fell to the lowest in more than three years. Banks, shippers and insurers, which plunged the most in the sell-off this year until mid-February, are now among the best performers. Credit Suisse said negative interest rates will have less impact on lenders’ earnings than previously thought.
“People are looking to pick up quality names that have fallen a lot,” said Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners in Singapore. “The banks have been destroyed since the Bank of Japan came out with negative interest rates and now people are looking and saying: how bad is it?”
Still, for Citigroup, it’s too early to say the downturn has stopped.
“We anticipate a rebound due in part to expectations for government policy. However, it is unclear whether this will produce a real bottom,” Naoki Iizuka, chief Japan equity strategist at the brokerage, wrote in a report dated March 2. “Downside risks to the global economy have not been dispelled.”
Daiwa SB Investments, however, sees a Topix with plenty of upside. The measure is still down 11% this year.
“Shares were sold off too hard,” said Soichiro Monji, chief strategist at the asset manager. “The global economy is looking better and China isn’t that bad. Japanese shares are still too low, so there’s plenty of room to rise.”
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