Analysts: Japanese bull run not over
Nikkei 225 already up 21% from February
TOKYO: The global stock market’s biggest comeback story of 2016 isn’t over yet.
So say Citigroup Inc, AllianceBernstein and Bordier & Cie, who all see further gains for Japanese shares after the Nikkei 225 Stock Average climbed more than 20% from this year’s low. The US$5 trillion market has outperformed all its developed-nation peers since late June, buoyed by a weakening yen, a more favourable monetary policy stance from the Bank of Japan and the return of overseas money managers.
The Topix index joined the Nikkei 225 in a bull market on Monday, adding 1% to 1,442.93 at the close in Tokyo. The broader stock gauge is up 21% from its low in February.
It’s a dramatic recovery for a market that sank at least 18% in the first half as the yen strengthened and investors lost confidence in Prime Minister Shinzo Abe’s ability to revive economic growth. While sceptics warn the gains are vulnerable to weak domestic demand and any number of potential surprises from US President-elect Donald Trump, optimists can take heart from Japan’s history of sustained rallies. The Nikkei 225’s average bull market since 1970 has delivered a 90% gain over more than 600 calendar days, four times longer than the index’s current advance from its June low.
“A lot of things are lining up for Japanese equities,” said Bryan Goh, the Singaporebased chief investment officer of Bordier & Cie, which oversees about $9 billion. “It looks like the economy is stabilising and the weak currency is certainly helping. There’s some momentum behind this bull run.”
The market’s latest tailwind comes from the US, where Trump’s shock election victory has fuelled speculation that increased government spending will lead to higher US interest rates and a stronger dollar. That’s good news for Japan because it translates into a weaker yen and an improved earnings outlook for exporters like Toyota Motor Corp. The Japanese currency has dropped 6% versus the greenback over the past month, more than any other major Asian currency.
“This is a very big regime change in US economic policy that could be a gamechanger for the yen and the Japanese stock market,” said Naoki Murakami, a Tokyo-based market strategist at AllianceBernstein, which oversees about $483 billion worldwide.
Trump-induced equity gains over the past two weeks have built on optimism over the Bank of Japan’s decision to refrain from pushing interest rates further into negative territory, a policy that had battered bank shares earlier this year. A better than estimated 2.2% Japanese economic growth figure for the third quarter also added to the bullish sentiment, despite evidence that private consumption remains tepid.
“Market behaviour is looking good and government policy is supportive,” said Rob Weatherston, a manager of Japanese equities at Old Mutual Global Investors in Hong Kong.
Not everyone is convinced the rebound has legs. Mikio Kumada, who helps oversee about $50 billion as Hong Kong-based executive director at LGT Capital Partners, said he’d like to see more political and economic certainty before turning bullish, while Binay Chandgothia at Principal Global Investors cautions that Japanese shares are simply getting swept up in a bout of optimism over the world economy.
“My feeling is the rally isn’t linked to Japan itself,” said Chandgothia, a Hong Kong-based portfolio manager at Principal Global, which oversees $402 billion and has a neutral position in the country’s shares. “The movement is linked to evidence that global growth is getting stronger, the belief that trade will pick up, and the US dollar. The expectations are very low for Japan.”
For Naoki Iizuka, Citigroup’s Japan equity strategist in Tokyo, the earnings boost from a weak yen and the potential return of foreign buyers are enough to push the market higher. He boosted his end2017 forecast for the country’s Topix index to 1,625 from 1,525 on Nov 18, implying a 14% gain from current levels.
While international money managers sold a net $56 billion of the nation’s stocks through the end of September, they’ve since purchased almost $7.3 billion, according to data compiled by Bloomberg.