China’s rerating continues while yen stumbles on policy pause
China’s rerating continues, pressuring global funds to raise weightings
As we have noted we have little doubt that the speed of China’s stock rerating has sent tremors through halls of global asset allocators. Indeed what to do with China’s market weighting has become a key issue, coming so soon after the yen carry unwind shock and one which could have a big impact on all Asian and emerging markets, including in Japan where we have sensed money leaving.
We suspect this China rerating will continue until the year-end, and at least for China’s blue chip tech names which we have liked and underlined in our recent publications, just prior to the stimulus measures unveilings. Our off-remit call on this group is simply based on their valuations and the fact that they mostly have no debt and buying back chunky amounts of their own shares.
Even after their recent rally, they still look relatively attractive versus their peers overseas, especially now after China having seemingly drawn a firm support under their valuations. Although technically China stocks look overbought, we suspect there is a big line of institutional investors, waiting to pounce on any meaningful correction.
We think this leaves a solid support for these names, at least until year end when asset allocators can re-evaluate where they are. But for now, we think its fair to assume that those who are still underweight China will probably be more comfortable raising their exposure to even just neutral wighting to avoid more underperformance risk.
Yen at risk again as both Fed and BOJ temper expectations
As we’ve noted, the new dovish tone adopted by BOJ after its last policy meeting came as a big surprise to us given preceding meetings where officials were defending the previous rate hike. Although we were not expecting any action by the central bank last month, especially ahead of the LDP leadership race, we thought its latest dovish turn in narrative was likely due to yen’s recent recovery in value and less urgency to raise rates again for any other reason.
However, as we have also been pointing out since, Japan policy makers will have to tread carefully now as more talks of keeping rates low could lead to yet another yen currency crisis and undoing all the good work BOJ had done in saving the Japanese currency from the abyss in the summer.
What’s interesting is that this comes at a time when the US Fed is also trying to reign in expectations for continued aggressive rate cuts in fear of reawakening inflationary expectations. This policy pause from both BOJ and the FED has seemingly sparked fresh rounds of yen selling and talks of the carry trade being put back on again.
Japan’s political under-currents haven’t helped either as the newly elected LDP leader, Ishida-san (who is effectively Japan’s current caretaker PM until the general elections in late October) has tried to dismiss market concerns about his previous hawkish monetary policy stance by pointing out that deflations needs to be defeated and BOJ should keep rates steady.
But what we do know is that policy makers do not want to see the dollar/yen back near 160 levels. So unless BOJ and MOF, not to mention, Japan’s newly elected political leaders begin singing from the same hymn sheet by prioritising defending the Japanese currency, the carry trade could push the yen back towards its summer lows.