Hunting for Upside In Japan Stocks Amid Trade War Fears

(Bloomberg) -- The intensifying trade war between the world’s two-largest economies took predictable casualties Monday as stocks fell, but it also engendered something which has been in short supply in Asian equities recently -- optimism.

Japanese stocks sliding toward a January low to start the week may prove to be a buying opportunity, according to Citigroup Inc., even as a potential trade deal with the U.S. was overshadowed by broader investor concerns.

The latest slump is par for the course if recent history is any indication, said strategist Tomochika Kitaoka. Since 2017, the Topix has tended to fall around 3% after U.S. tariff shocks, while the yen appreciates about 1 yen per dollar, before markets stabilize two to three weeks later. The yen surged to a three-year high before paring gains.

“We expect a modest rebound in autumn as negative catalysts are exhausted and net selling tapers off,” Kitaoka said in a note to clients. “Now is a good opportunity to increase exposure to undervalued stocks with specific catalysts such as share buybacks, as typified by autos and transport equipment given the likelihood of a favorable outcome for U.S.-Japan trade talks.”

Still, weak earnings growth remains a problem, limiting upside. As a result Citi cut its year-end projection for the Topix by 50 points to 1,600 -- just over 8% above current levels.

The U.S. and Japan agreed in principle on a trade deal under which Japan will slash tariffs on U.S. beef, pork and other agricultural products while continuing to face levies on its own auto imports, U.S. President Donald Trump and Japanese Prime Minister Shinzo Abe announced Sunday. Japanese officials may consider this a good deal if they can get a promise their automakers will be shielded from more painful tariffs.

News of the deal did little for the Topix Monday as it tumbled as much as 2.5% to erase gains for the year. The MSCI Asia Pacific Index dropped over 1% with Hong Kong down over 3% and Taiwan and South Korea also fell. U.S. equity futures declined as much as 1.6%.

Investors continued their flight to safe havens after Trump said he had second thoughts about escalating a trade war with China, only for aides to later say he actually meant he regretted not raising tariffs more. Meanwhile, Hong Kong assets will continue to be in focus after police made at least 36 arrests as violence returned after the prior week’s peaceful rallies.

Stock Market Summary

• MSCI Asia Pacific Index ex-Japan down 2%
• MSCI Asia Pacific Index down 1.6%
• Japan’s Topix index down 1.8%; Nikkei 225 down 2.2%
• Hong Kong’s Hang Seng Index down 3.2%; Hang Seng China Enterprises down 3%; Shanghai Composite down 1.1%; CSI 300 down 1.3%
• Taiwan’s Taiex index down 1.6%
• South Korea’s Kospi index down 1.6%; Kospi 200 down 1.6%
• Australia’s S&P/ASX 200 down 1.5%; New Zealand’s S&P/NZX 50 down 1.8%
• Singapore’s Straits Times Index down 1.4%; Malaysia’s KLCI down 1%; Jakarta Composite down 1.4%
• S&P 500 e-mini futures down 0.8% after index closed down 2.6% 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, Lianting Tu

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