China’s rebound sends shock waves through global portfolios
Not long after the yen carry trade unwind, comes another macro-driven shock as Chinese government’s sudden change in urgency in reflating its economy, practically pledging that they will do everything it takes to halt the economic slowdown, sending investors clamouring for exactly those China tech names which we only outlined last week as ones looking glaringly undervalued and too attractive to ignore.
We have no doubt that the violent inflows back into under-owned Chinese stocks has sent tremors through halls of global asset allocators. With US market looking rich, India already rerated while Japan’s bull market slam dunk thesis has unraveled with the stronger yen, China is simply looking too cheap, even now, to pass up. That was our key argument last week, not knowing that the authorities were about to hugely surprise the market with number of stimulus measures. But with line of support now drawn by policy makers, we suspect China’s market and its tech champions have much more room to rerate.
Some thoughts on Japan stocks
Although Japanese firms will no doubt benefit from China’s economic recovery, the downside is that global money allocated to Japanese stock market since last year, mainly as an alternative to China will most likely go back to Chinese stocks. From the top down macro economic perspective, there really isn’t any obvious bullish signals for Japan’s stock market, at least in the near term.
To be sure, better corporate governance and shareholder returns still leave opportunities for those looking at Japan from the bottom-up perspective. However, with Japan’s economy remaining anaemic at best, partly dragged by its fast ageing society and big shortages of labour, growth headwinds remain heavy. Although we have been encouraged by BOJ’s change in policy towards normalisation, the benefits of stronger yen and its lower costs for households and smaller, more domestic-oriented businesses, are likely to take some time to trickle down.
As we also noted last week, BOJ’s sudden dovish tone, also leaves long term rates with little upside room in the near term, especially as some domestic institutional investors have already begun raising their JGB holdings. This we’ve argued leaves limited upside potential for longer term rates and raises questions about Japan banks stocks which most overseas funds have been overweighting.
We don’t want to dwell too much into Japan politics this week given the flood of articles following the conclusion of the LDP leadership race which effectively gave the premiership to Shigeru Ishiba. We think he is another safe choice in the face of a fast fragmenting ruling party which was glued together by factions which have since been dissolved, due to the party’s slush fund scandal. We don’t see Ishiba-san lasting much longer than Kishida has. More importantly, we think we may see some young turks break away party ranks and form their own smaller groups that could forge alliances with the opposition.
One positive we see in the immediate horizon, is coming from technology and promising trends emerging by AI adoption with memory being the most obvious segment and one which Micron (MU) underlined by its bullish guidance last week. This is potentially one positive cross-current from tech stocks, a segment which happens to look fairly oversold in Japan, which we suspect may outperform for the rest of the year.
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