Even as Nikkei 225 Tumbles, It's Hard to Find a Japan Stock Bear

(Bloomberg) -- Nader Naeimi of AMP Capital Investors Ltd. already has more than 30 percent of his assets in cash, and now he’s going long the yen as a hedge against Asian stock declines. Hiroshi Matsumoto of Pictet Asset Management Japan Ltd. increased his cash holdings last week.

But even though both investors are becoming more cautious about equities, they -- and pretty much everyone else Bloomberg spoke with Monday -- remain optimistic on the outlook for the bull run in Japanese stocks that propelled the Nikkei 225 Stock Average to its highest in a quarter century. That’s even as the gauge started the week with its biggest decline since November 2016.

The Nikkei 225 tumbled 2.6 percent Monday, buffeted by a selloff in U.S. shares Friday that sent the S&P 500 Index to its worst drop since September 2016. While that was triggered by surging Treasury yields and the prospects of accelerated Federal Reserve tightening, those reasons may not be at play in Japan. As if to underscore that point, Bank of Japan Governor Haruhiko Kuroda stressed Monday that there was no change to the bank’s approach to quantitative easing.

“Sentiment-driven corrections can be quite steep and quite painful,” Naeimi, who helps oversee $120 billion for AMP, said in a phone interview. But “I still maintain my conviction about Japanese shares.”

What Concerns?

The Nikkei 225 erased its advance for the year Monday, while the Topix index ended down 4.6 percent from its January peak, as Japanese stocks were sucked into the rout caused by Treasuries rising to a four-year high. That’s narrowed the spread between the earnings yield on U.S. equities and the yield available on fixed income, creating a sense of angst about the world’s biggest market that has spread further afield. Even outgoing Fed Chair Janet Yellen chimed in on Sunday, saying U.S. stock prices are elevated.

Nicholas Smith, a strategist at CLSA Ltd. in Tokyo, agreed with Naeimi that there are no such concerns in Japan. Profits are surging: almost 70 percent of Nikkei 225 companies have beaten analysts’ estimates in the current quarterly reporting season. And the 10-year Japanese government bond yield is less than 0.1 percent. In fact, the spread between Nikkei 225 earnings and the 10-year yield isn’t far short of its widest in a decade.

“If you think about it in terms of earnings yield minus bond yield, then Japan is absolutely dirt cheap,” Smith said. But “the biggest worry is that the Japanese market is so highly correlated to the U.S.”

For Pictet’s Matsumoto, who helps oversee $18 billion for the money manager in Japan, the selloff may be no bad thing. He points to an atmosphere of euphoria that pervaded the market after the Nikkei 225 surged 19 percent last year and surpassed 24,000 in January for the first time since 1991. The rally even had one strategist citing a target of 34,500.

Healthy Correction

This is “a healthy correction,” said Matsumoto, who noted he wouldn’t be surprised to see the Nikkei 225 fall as much as 10 percent from its January high before resuming its ascent. Matsumoto increased cash holdings to 5 percent from 2 percent, he said. “The market had been too optimistic.”

Naeimi predicted a selloff in equity markets in September -- tied, admittedly, to North Korea -- and said he had 30 percent of holdings in cash. That level has slightly increased today, he said, but while his portfolio retains a defensive bias, and he’s buying the yen as a hedge, he says it’s against declines in emerging-market equities.

When it comes to Japan, he’s much more sanguine. In fact, he expects Japanese stocks to break their years-long correlation with a weaker yen and start to rise along with the currency. Naeimi, like many of his peers, greeted Monday’s selloff with insouciance.

“Market fundamentals are very positive,” Naeimi said. “Japan is in a really good setup now.”

--With assistance from Livia Yap

To contact the reporter on this story: Min Jeong Lee in Tokyo at mlee754@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Tom Redmond

©2018 Bloomberg L.P.