Biggest comeback breathes life into Japan’s equity bulls

Bloomberg

The global stock market’s biggest comeback story of 2016 isn’t over yet.
So say Citigroup Inc., AllianceBernstein and Bordier & Cie, who all see further gains for Japanese shares after the Nikkei 225 Stock Average climbed more than 20 percent from this year’s low. The $5 trillion market has outperformed all its developed-nation peers since late June, buoyed by a weakening yen, a more favorable monetary policy stance from the Bank of Japan and the return of overseas money managers.
It’s a dramatic recovery for a market that sank 18 percent in the first half as the yen strengthened and investors lost confidence in Prime Minister Shinzo Abe’s ability to revive economic growth. While skeptics warn that the gains are vulnerable to weak domestic demand and any number of potential surprises from U.S. President-elect Donald Trump, optimists can take heart from Japan’s history of sustained rallies. The Nikkei 225’s average bull market since 1970 has delivered a 90 percent gain over more than 600 calendar days, four times longer than the index’s current advance from its June low.
“A lot of things are lining up for Japanese equities,” said Bryan Goh, the Singapore-based chief investment officer of Bordier & Cie, which oversees about $9 billion. “It looks like the economy is stabilizing and the weak currency is certainly helping. There’s some momentum behind this bull run.”
The market’s latest tailwind comes from America, where Trump’s shock election victory has fueled speculation that increased government spending will lead to higher U.S. interest rates and a stronger dollar. That’s good news for Japan because it translates into a weaker yen and an improved earnings outlook for exporters like Toyota Motor Corp.
The Japanese currency has dropped 6 percent versus the greenback over the past month, more than any other major Asian currency.
“This is a very big regime change in U.S. economic policy that could be a game-changer for the yen and the Japanese stock market,” said Naoki Murakami, a Tokyo-based market strategist at AllianceBernstein, which oversees about $483 billion worldwide.
Trump-induced equity gains over the past two weeks have built on optimism over the BOJ’s decision to refrain from pushing interest rates further into negative territory, a policy that had battered bank shares earlier this year. A better-than-estimated 2.2 percent Japanese economic growth figure for the third quarter also added to the bullish sentiment, despite evidence that private consumption remains tepid.