Japan’s Eye-Catching Rally Splits Wall Street Titans on What’s Next
Japan’s Eye-Catching Rally Splits Wall Street Titans on What’s Next
(Bloomberg) -- After being one of the worst-performing markets in the developed world, Japan’s recent equity rebound is dividing Wall Street views on where it will go next.
On the skeptical side, BlackRock Inc. told investors not to chase the rally, and Pictet Asset Management Ltd.’s Hiroshi Matsumoto said the country’s economy remains vulnerable to a potential breakdown in trade talks between the U.S. and China, Japan’s top two trade partners. That’s why it’s too early to give a “green light” to the market, said the head of Japan investment for the $192 billion fund house.
Morgan Stanley and UBS Group AG’s wealth-management unit are among the bulls. Both cite reasons such as cheap valuations and better earnings momentum for turning positive. And for now, the market has been favoring the optimists, with the benchmark Topix index gaining 3.5% this month through Thursday, the second-best advance in the region. The gauge climbed 0.2% by 9:46 a.m. local time Friday.
“Investors had been too negative on Japanese equities due to the concern over the impact of trade tensions,” said Chisa Kobayashi, an analyst at UBS Global Wealth Management CIO. “We see Japanese equities having upside for next year on the back of a recovery in corporate earnings and international investors returning to the market.”
She notes that despite the recent rebound, the shares are still inexpensive. Companies in the Topix index trade at 13 times estimated earnings for the next year, lower than the five-year average, data compiled by Bloomberg show.
Jim McCafferty, Nomura Holdings Inc.’s joint head of Asia-Pacific equity research, says an increase in share buybacks bodes well for the Japanese market. And if earnings momentum becomes positive, Japan would become more attractive than the U.S., where valuations look increasingly stretched, he said.
Bets are also growing for further central-bank action, which could boost shares further. Bank of Japan Governor Haruhiko Kuroda’s call in September for a review of how a global slowdown could threaten its mission to stimulate price growth spurred speculation for a policy move this month.
And it’s not just about the fundamentals. The Rugby World Cup and next year’s Olympics will boost Japanese stocks too, according to Sean Darby, global equity strategist with Jefferies Financial Group Inc. The events could help raise awareness of local brands, and “there are a lot of things we could buy in Japan, which are not necessarily related to the global economy,” he said.
To Pictet’s Matsumoto, not only Japan’s consumption tax hike is a possible “detrimental factor” to the economy, but should spending on capital expenditure slow down in China and the U.S., Japanese companies may end up earning less money. Global growth needs to stage a comeback for a full recovery in the stocks, he said.
But warning signs have been flashing for this export economy. China’s expansion slowed to 6% in the third quarter, and worries about a further weakening are growing. In the U.S., data have also been sluggish, with trade uncertainties among the factors weighing on industrial production, according to Bloomberg Intelligence.
Japan’s recovery isn’t guaranteed, and a major moving part remains the trade talks. To Olivier D’Assier, Qontigo’s head of applied research in Asia Pacific, a deterioration in the U.S.-China discussions could lead to Japan giving up all of its year-to-date gains and seeing volatility spike to last year’s highs.
“Trump and Xi could turn friendly, or they may not,” Pictet’s Matsumoto said in a phone interview. His firm has been neutral on Japan equities since the end of last year. “I simply don’t know.”
(A previous version of this story was corrected to reflect Chisa Kobayashi is a woman.)
To contact the reporters on this story: Moxy Ying in Hong Kong at yying13@bloomberg.net;Min Jeong Lee in Tokyo at mlee754@bloomberg.net
To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Cecile Vannucci, Margo Towie
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