Japan Shares' Silver Lining as IMF Slashes Outlook

(Bloomberg) -- Anxieties over the pace of global growth are once again weighing on the minds of investors after the International Monetary Fund slashed its outlook for the world economy to the lowest level since the financial crisis.

Yet for Japan, the bleaker projections may prove to be a portent for more positive returns ahead in the medium term, according to strategists at Citigroup Inc.

“Returns on the Topix have tended to be positive in the six months after downgrades to the IMF outlook,” said Tomochika Kitaoka, chief equity strategist with Citigroup Global Markets Japan Inc., in a note to clients. “Sentiment and the consensus have generally deteriorated sufficiently at the time the IMF revises down its outlook, so reversals are common.”

Previous examples include a more than 50 percent jump in the Topix index in the six months following the IMF’s outlook downgrade in October 2012, and about a 40 percent surge for gauge in the six months after the revision in January 2013, according to data compiled by Citi and Bloomberg.

More dovish overtones from monetary and fiscal authorities globally may also have had an effect previously, although the market has fully priced in this factor in this case, and a lack of strong policy stimulus for demand is a difference from the past, he said.

Negative Reaction

Asian markets reacted negatively to the IMF cuts Wednesday, with the MSCI Asia Pacific Index retreating 0.4 percent to halt a three-day advance. Japan’s Topix Index fell 0.8 percent to lead declines across key markets in the region, though Australia edged higher. U.S. equity futures were flat after stocks in New York closed lower overnight.

The world economy is projected to grow just 3.3 percent this year, down from the 3.5 percent the IMF had forecast for 2019 in January, the fund said Tuesday in its latest World Economic Outlook. It’s the third time the IMF has downgraded its outlook in six months.

“This is a precarious situation and there continues to be many downside risks,” Gita Gopinath, IMF’s chief economist, said in an interview with Bloomberg Television. “Even though the trade tensions look like they have improved there are risks to trade.”

The IMF is forecasting a “delicate recovery” in 2020 that will rely on stronger showings from many stressed economies around the world, including Argentina, Turkey, the euro zone and China, she said.

Japan Growth

As for Japan, its 2019 growth projection was cut by 0.1 percentage point to 1 percent while the 2020 forecast was left unchanged at a sluggish 0.5 percent, according to the IMF. Data Wednesday showed Japan’s machinery orders rose only modestly in February after several months of declines, falling short of economists’ forecasts and raising concerns about capital spending. Japanese consumers also face a looming sales tax hike later this year.

There’s certainly room for Japanese stocks to rally, with the Topix underperforming its Asian peers this year and Japan’s stock market falling behind Hong Kong’s in terms of total market capitalization. Foreign investors have also dumped more than $22 billion of Japanese equities this year through March 27, according to analysts at Jefferies Financial Group Inc citing EPFR Global data.

Stock-Market Summary

• MSCI Asia Pacific Index down 0.4%
• Japan’s Topix index down 0.8%; Nikkei 225 down 0.7%
• Hong Kong’s Hang Seng Index down 0.4%; Hang Seng China Enterprises down 0.7%; Shanghai Composite down 0.4%; CSI 300 down 0.4%
• Taiwan’s Taiex index down 0.2%
• South Korea’s Kospi index little changed; Kospi 200 little changed
• Australia’s S&P/ASX 200 little changed; New Zealand’s S&P/NZX 50 down 0.7%
• India’s S&P BSE Sensex Index little changed; NSE Nifty 50 little changed
• Singapore’s Straits Times Index little changed; Malaysia’s KLCI down 0.3%; Philippine Stock Exchange Index up 0.8%; Jakarta Composite down 0.2%; Thailand’s SET up 0.1%; Vietnam’s VN Index down 0.9%
• S&P 500 e-mini futures little changed after index closed down 0.6% in last session

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Kurt Schussler

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