Japan stocks look poised for big year-end rally

US stock market melt-up leaves Japan poised to join the party
Although nothing has yet to manage to derail America’s booming stock market, at least now we are seeing very positive developments to back the optimism. With strong US job data supporting the view that the labour market will tighten up as pandemic-related handouts come to an end, the economic recovery seems to be broadening, a trend which we very much anticipate for next term. To be sure, we have much concerns regarding the impacts of slowing Chinese demand and growing geopolitical tensions which could disrupt global trade. But these look to be next year’s problems as signs are good for this melt-up to continue for the remainder of 2021. 

Despite Covid infection rates surging again in the northern hemisphere as winter arrives, Pfizer’s unveiling of its reportedly highly effective Covid pill, not long after Merk’s antiviral tablet, hopes are high that the coming therapeutics, will provide another strong line of defence as impact of the pandemic on our daily lives continues to fade. Moreover, as mRNA booster shots get recalibrated for the current variants next year and as most governments come to terms with living with the endemic pathogen, we see global economic normalisation accelerating from here. 

With Mr. Biden’s $550bn infrastructure plan having also just passed the House vote, we think prospect for stagflation have dimmed even more. Bank of England’s surprise decision to leave rates unchanged also support some views that key central banks are likely to keep economies running hotter than normal to allow time for pandemic-related inflationary anomalies to disappear. Come what may, price hikes are being passed on while current wage and rent inflation seem to becoming fairly entrenched. All these factors are likely to keep US longer term rates on a steady upward trend, a precondition for our bullish Japan market outlook given its highly cyclical nature.

Although we were hoping for Japan stock market to be outperforming other majors by now, Topix has given up much of its lead built up in September and has performed relatively poorly thus far this quarter, especially in dollar terms. However, Japanese market tends to get rerated in short bursts and we retain our bullish stance on cyclical/value names which have generally shown robust quarterly earnings. Indeed, results in general have proven healthy this earnings season despite Japan’s high industry gearing to the auto sector whose output has been hit hard by chip shortages. 

Moreover, with Japan elections out of the way, and vaccination rates likely to reach 80% level by the month-end, we think tourist travel corridors will be opened fairly soon and before the holiday season. Add Japan’s compelling valuations, rising shareholder returns and on top of it all, continued Abenomics policies under the newly elected government which if nothing else, should further boost asset prices, we see our market poised for a big rally that should take Topix above ¥2200 by year-end.