LGT: Japan's Bull Market is not Over Donnerstag, 20. März 2014 - 10:48
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Japan's Bull Market is not Over
Japanese stocks have been disappointed thus far in 2014. On the one hand, some observers fear that Japan's policy makers are too complacent, given growing regional economic risks and the pending sales tax increases at home. On the other hand, just barely two years since the start of Japan’s bull market, it is perfectly normal to see that many investors still harbor doubts - just recall the various dangers the US and Europe seemed to be exposed to in 2011 and 2012.
Please find below the market comment by Mikio Kumada, Global Strategist from LGT Capital Management:
For more information please contact:
Roland Cecchetto or Kim Ghilardi Communicators +41 44 455 56 66 roland.cecchetto@communicators.ch; kim.ghilardi@communicators.ch
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Japan's Bull Market is not Over
Japanese stocks have disappointed thus far in 2014. On the one hand, some observers fear that Japan's policy makers are too complacent, given growing regional economic risks and the pending sales tax increases at home. On the other hand, just barely two years since the start of Japan’s bull market, it is perfectly normal to see that many investors still harbor doubts - just recall the various dangers the US and Europe seemed to be exposed to in 2011 and 2012.
Who will be proven right in the end? Those who believe in the successful reflation of an aging but formidable industrial economy, or those who view Japan’s 2012-2013 stock market surge as nothing more than the last hurray of a doomed has-been? In between these extremes, of course, we also have the opportunistic trend-followers - a faction that generally lacks strong convictions, but still plays the decisive role during transitory market phases. And that group has recently started to detach itself from its initial enthusiasm (if any) for “Abenomics”, to join the ranks of the doubters. Narratives about (supposedly) disappointing economic data serve to intellectually underpin this shift, which is occurring just before a much-feared consumption tax hike is due to take effect in Japan, and amid rekindled fears about the possibility of a major credit crunch in China, Japan’s biggest trade partner in Asia. Pay attention to the trend- relevant market signals The economic arguments against Japan do not seem very convincing to us thus far. Needless to say, it is ultimately the market that is always right in the end - which is why it is useful to start with looking into the markets themselves for possible clues about the future. As always, we focus on medium-term trends and the bigger picture, rather than occasional, potentially confusing noise. To be sure, Japanese stock market performance has been disappointing since the beginning of the year. On closer inspection, however, the following observations appear particularly noteworthy in terms of qualifying that judgment. Normalization after exceptional quick-fix step The recent weakness of Japanese equities is not general, but primarily emerging against the US and Europe, while the market’s overall trading pattern still points to a normal “consolidation” after an extremely strong and sharp surge. After all, we must recall that from November 2012 to May 2013, in just six months, Japanese equities recovered about half of a huge performance gap that had been accumulated versus the rest of the world over the preceding four years. Following this extraordinary catch-up, however, Japan’s market pattern has started to duly “normalize” again - i.e. it is now more closely following the global pattern. This means that Japanese equities may no longer generally outperform as strongly and comprehensively as they did in 2012 and 2013, but it certainly doesn’t mean that Japan’s bull market trend has been broken. Government bond markets with risk- friendly undertone Meanwhile, debt markets are not signaling noteworthy risks or problems either. Currently, there were two negative themes present in the markets: concerns about a possible escalation of the Ukraine crisis, and/or an even bigger economic slowdown in China. Such themes, generally tend to support the so-called “risk-free” sovereign bond markets. That said, any deviation from such a general (and temporary) uptick in risk aversion, such as a big deterioration in the underlying views on Japan’s outlook, for example, should sooner or later manifest itself in the broader debt markets in some way. However, there has been no abnormal shift within the debt markets either: Japan continues to perform in line or better than Germany, the best-rated sovereign borrower among the major economies. In addition, the euro periphery’s bonds also continue to perform even better, which is in line with preexisting trends as well, and hardly a sign of a deteriorating global risk appetite. Concluding, what is true for all markets is also true for Japan. Despite some worrying headlines, none of the established trends have actually really changed in recent weeks or months. Japan’s stock market consolidation may be taking a little longer than we would have expected three months ago, but it is still most probably just that - a transitory pause, rather than the end of the bull market.
Equities: Normalization as part of the consolidation The first graph (PDF page 2) visualizes Japan’s underperformance since the low of the financial crisis of 2007/2008. For various reasons (economic policy, natural disasters), Japan did not participate in the global bull market that began in March 2009. Before the crisis, Japan was more frequently and more closely moving in line with the global trend. But for the four years between 2008 and 2012, it lagged consistently, accumulating a performance gap to an extent that was unusual even during the Japan’s past deflation-plagued decades. This gap, representing pent-up potential performance, was very quickly closed to a large extend in a single upsurge from November 2012 to May 2013, as investors began realizing a significant change in policy was coming. Thereafter, Japan’s market trading pattern has started to normalize again - i.e. it began to more closely follow the global patterns. This adjustment has also brought about some periods of underperformance. However, the overall trend in favor of Japanese equities has not been broken as yet.
Government bonds: risk-friendly environment unbroken The bond markets do not reveal any dangerous trend reversals or deviations either. The following chart (PDF page 2) shows the total returns of Bloomberg/EFFAS indices of seven- to ten-year government bonds in the various local currency (the euro-periphery is represented here by an equally-weighted index of Irish, Portuguese, Spanish, Italian and Greek bonds). Trend breaks or extreme developments that could be point to deeper problems or rising risk lurking aversion are hard to make out. On the contrary: the most striking trend is the unbroken strength of the risk-friendly environment that has been driving lower-rated government bonds since mid-2011. That rally also included Japan bond - which is the second lowest-rated G7 sovereign after Italy.