Japan’s stock market range bound while uncertainties linger
After a two-week break, we have resumed our weekly publications although there has been very little to highlight in regard to Japan’s stock market. Our market remains in a holding pattern for now with the Topix still trending sideways, stuck in a range between 1900 and 2000 level which it has been trading in-between since February. With Covid infection rates still looking elevated in Japan’s key metropolitan regions while the government remains adamant in staging the Olympics games later this month, investors remain cautious of the likelihood for yet another spike in the spread of the disease in late summer.
In the meantime, US market continues to claw its way to record highs led by a narrowing list of larger tech names which have regained their leadership from the middle of last quarter while cyclical and re-opening plays have lagged behind. This is despite fast falling Covid-related fatalities with close to half of the US population now fully vaccinated. With proposed fiscal investment programs yet to be approved by US law makers, and Covid variants remaining problematic worldwide, we suspect market participants have been rotating back towards the larger tech names more as a defensive posture.
Geopolitical tensions with China also remain notably high as Chinese leadership are sounding ever more hawkish about what they perceive to be foreign interference in the country’s domestic policies related to alleged human rights violations in Xinjiang province, stifling democracy in HK and the ‘One China’ policy related to Taiwan. With technology looking to be the epicentre of this brewing cold war between the West and China, we remain highly vigilant of any policies that could effectively ban all technology exports to China which could greatly impact the businesses of Japanese semiconductor material and manufacturing equipment firms.
Strong Q2 earnings and weak yen to push Topix above this year’s highs
Although back in May, we pushed out our bullish short-term call for our market to this quarter, we continue to believe that cyclicals and re-opening plays will lead the way forward again with Japan’s stock market likely to outperform most other developing markets in the months ahead. We expect Topix to break above its March highs with a change of polarity to take place above that key Y2K level before the end of this quarter.
Given Japan’s relatively attractive average forward earnings multiples of around 15x, book values averaging around 1.3x despite generally solid corporate balance sheets and given the notable trend among listed firms towards adopting higher pay-out ratios through buybacks and share retirement programs, we have high hopes for another big leg up in the current half of this year, especially in Q4. With vaccines clearly looking highly effective against Covid variants globally, we thus believe market’s consolidation since the last quarter and ahead of this month’s Olympic games should be regarded as a strong buying opportunity even if we did see a temporary surge in Covid infection rates in Japan.
Our bullish scenario is especially supported by the ¥$ rate which has broken above its late March highs and looks to be heading towards the 115 level. This is substantially above average 108 assumptions made by Japan’s exporters in projecting earnings for this year. Indeed, we believe the coming earnings season starting later this month should continue show stellar earnings recovery trend, mainly among industrial value names which remain highly operationally leveraged and big beneficiaries of post-Covid normalisation trends.