According to the news report by Bloomberg, Japan, now the world’s second largest and Asia’s largest stock market, is expected to gain more attention. On Friday, at the end of trading, Japan’s equities were worth $6.15 trillion, while China, the erstwhile Asian leader and the country that Japan ousted, showed equities worth less than $6 trillion.
This is the first time since 2014 that Japan has beat China to become the number two stock market in the world, just behind the US. Due to the ever-escalating trade war between the US and China, Chinese stocks have been suffering.
Japanese equities, on the other hand, have been seeing improved earnings as well as strong support from the country’s central bank, the Bank of Japan. The Japanese central bank just made its annual purchase of exchange traded funds worth ¥6 trillion (~$54 billion).
While the Japanese Topix Index is down by 4.1% for the year so far, the Chinese Shanghai Composite Index is down by a huge 17% for the same time period.
However, market analysts are still a little skeptical about how this ongoing trade war is going to impact Japanese stocks. According to equity strategist at CLSA Ltd., Nicholas Smith, if there is a trade war between China and the US, then Japan can take advantage of the situation by trading both sides.
Be that may, almost 60% of the Japanese companies that have reported their quarterly earnings have beat analyst estimates. This week, some of the top Japanese companies due to announce their earnings for the previous quarter are SoftBank Group Corp., Recruit Holdings Co. and Nippon Telegraph & Telephone Corp.
According to the head of Asia equity research in Union Bancair Privee, Kieran Calder, one of the major drivers for such excellent performance by the Japanese stocks is the earnings of companies like Fujitsu, Hitachi and Sony.
Calder stated that these upbeat trends in Japanese stocks are expected to continue. He said that the first quarter earnings reports indicate that there is definite room for upward guidance revisions, which tend to be rather conservative at the beginning of the year.
Calder also stated that considering that many companies have based their forecasts on the assumption that the Japanese Yen will trade at ¥105 to the US Dollar, the current forex conversions actually act as tailwinds to these companies.
According to JP Morgan Asset Management’s global market strategist, Yoshinori Shigemi, the tricky part for Japan is that the country is dependent on other countries such as China and the US, as well the Yen remaining weak. He feels that Japan’s corporate earnings will continue to remain strong on the condition that the US economy continues to grow as strongly as it is currently doing, and that the Chinese government continues to support its economy by increasing fiscal spending and easing up on its monetary policy.
Nomura Holdings Inc.’s strategist Jim McCafferty, stated that an attractive valuation of its equities vis-à-vis other developed markets, political stability as well as signs that corporate governance is improving is making him optimistic about the Japanese stock market.
According to Smith from CLSA, Japanese companies are showing much greater enthusiasm for corporate governance, one of the factors that was previously deterring investors from betting on Japan’s stock market.
Not everyone is as bullish about Japanese markets. According to Soochow CSSD Capital Markets’ Japanese equities head Andrew Jackson, whether Japan is number 1 or number 2 doesn’t matter. What they are looking at is sector as well as market depth. Another factor that impacts their rating of equities is cost effective trading. At this point, Japan trumps China on both grounds.