A review of our 2023 calls and some predictions for this year
Looking back at our last year’s predictions, the calls turned out to be a mixed bag. Although we correctly predicted that China will disappoint bullish market expectations at the time, our calls for our own market in Japan proved too conservative as the BOJ did not dramatically alter its monetary policy as we had thought, leaving the yen weak, and shares of multinationals and exporters relatively strong against our expectations.
Moreover, changes to shareholders returns pushed through by Japan Exchange in early last year proved to be a big catalyst for outperformance of value stocks in Q2 and Q3. Nevertheless, despite BOJ’s inaction, our Japan market strategy of sticking with financial stocks which we had carried over from 2022 proved very fruitful and it was only in December when we decided to lower our suggested high exposure to the sector which we thought had become overcrowded with bulls.
Another notable change in our suggested investment stance entailed turning from a positive to a negative posture on Japan’s auto sector in October, after a very strong performance from the related plays which we thought had fully priced in the recovery in auto output following the disappearance of chip shortages which had disrupted sales in 2021 and 2022. The notable loss of market share by Japanese car makers in China where they are badly trailing domestic EV makers has also become one of our major concerns.
Moving on to this year, some of the current known unknowns that could disrupt global trade include rising geopolitical tensions with China, escalating war in Eastern Europe and expansion of the regional conflict in the Middle East. All of the above risks look plausible and keep us highly vigilant as they could unfold fairly quickly engulfing capital markets. In Japan, we also see more political turmoil ahead which we suspect is likely to force Kishida-san to resign as PM before April which we hope will pave the way for new leadership that could usher in an era of more fiscal discipline and broader economic reforms.
Also, just like last year we think the yen remains significantly undervalued and is likely to continue to strengthen following its notable trend reversal last November as US interest rates look to have peaked out. Unlike last year, however, we suspect much of the yen’s recovery will come more from weaker dollar against other major currencies while BOJ’s likely pivot in its monetary policy will prove more incremental as pressures from the weak yen and falling JGB market have greatly dissipated. Needless to add, appreciating Japanese currency will likely remove one major tailwind for shares of Japan’s multinationals and exporters whose earnings have been greatly flattered by the weak yen in the past two years. Indeed, we think that Japan’s manufacturing sector is likely to fall into a recession while we expect domestic and service-related segments to outperform the market as the coming wage increases help support consumption while inbound tourism in Japan continues to boom.
Although we think we should continue to see listed firms strive to improve their shareholder returns and corporate governance, and these efforts will help keep Japan’s stock market in vogue among international investors in the medium to longer term, we also see the near term headwinds mentioned above keeping the overall market somewhat range bound, at least for the first half of 2024. We thus expect stock picking to prove more pivotal this year and more neutral long/short strategies to have an edge over long-only ones.
Drilling down, we also think the potential for bottoming out of semiconductor capex, led by AI investments and recovery in smartphone demand will likely be tempered by the eventual exhaustion of Chinese hoarding of equipment combined with possible tighter export restrictions of capital goods to the region. We thus believe such elevated sales to Chinese chip makers stemmed from front-loading of their investment plans to stay ahead of any potential further tightening of export restrictions look unsustainable.
Meanwhile, we see Chinese tech firms increasingly sourcing their capital goods and material needs locally wherever they can. Indeed, we see this trend taking hold across many segments of the industry such as EVs and factory automation tools where percentage of local content is increasing significantly, threatening to shut out key Japanese component suppliers out of China’s big markets.
Finally we wish all our readers a peaceful and a prosperous 2024.