Japan stocks shine while we still see Topix outperforming Nikkei

Japan back in vogue as Nikkei breaches above 30,000
This week, we will focus mainly on our own market of Japan equities as Nikkei’s breach above 30,000 level for the first time since 1989 has captured much attention of the financial media and global investors. Although our benchmark and key focus remains the broader Topix index, the Nikkei 225 performance remains a symbolic measure whose lagging performance against other global stock indices has long underlined Japan’s infamous two lost decades since its asset bubble burst in the 90s. Incidentally, this was also a subject of our previous week’s publication where we drew parallels between the US asset bubble we are witnessing currently and Japan’s bubble of the late 80s. 

To be sure, we have been and remain bullish on Japanese stocks and we had earmarked 1900 target level for the Topix in the previous quarter which proved slightly too ambitious at the time as the index only hit that level earlier this month. As we underlined in our first publication of the year, we raised that target for this quarter to 2,000 as we see the ongoing recovery in China’s economy and the likely end to the Covid crisis in the second half of this year, at least in developed markets, all leaving the highly cyclical Japanese stock market poised for more advances ahead. {https://asymmetric-advisors.com/we-see-more-vaccines-coming-this-quarter-and-topix-to-outperform-nk225-in-2021/}|

Indeed, with Topix trading at an average of 12x peak 2018 earnings, 7x EV/EBITDA for that year and currently at 1.3x book, we continue to view our market as being relatively attractive and we expect it to outperform most other majors for some time to come. Moreover, the strengthening trend of the yen against the dollar which was one potential headwind for our market which we had outlined for much of last year is also starting to show signs of stabilising, if not reversing, as rising US treasury yields seems to have had an impact on the direction of the ¥$ rate. 

NT ratio has continued to surge against our expectations
As also noted in our first weekly publication of 2021 which we have provided the link to above, we’ve also been expecting Topix to begin outperforming the N225 from this year. This prediction has yet to pan out as the distorted nature of this somewhat obsolete Nikkei measure has left it 2.5% above the broader first section index thus far this year. To underline the distortions, it should be noted that the Nikkei’s weighting of its top ten names now account for 42% of the total index.

To reiterate, we continue to expect a more notable rotation out of tech, stay and work from home beneficiaries and into cyclical, travel and financial names. Thus, despite N225’s continued run versus the broader measure, we see Nikkei/Topix (NT) ratio finally peaking this year after having surged from 9.5 level low reached in September 2001 to its current level of 15.5. This leaves this highly correlated index pair trade of long Topix/short N225 potentially a very elegant bet to capture the changing of the guards in Japan’s stock market leaders as the rally continues from here.