(Bloomberg) — Japanese stocks lost $1.1 trillion in value and started August with a record three-day loss, giving bullish investors a new reason to invest in one of the hottest stocks of 2024.
Most read by Bloomberg
The stocks that have been hit hardest have been those that had risen the most, pushing prices down to more attractive levels. The valuation improvement campaign that has boosted the international appeal of Japanese stocks is still in full swing, and some of the excitement has disappeared from the now $6.1 trillion market.
The Bank of Japan’s sudden interest rate hike last month caught traders by surprise, but the central bank responded by saying it would not raise rates so quickly that it risked further market turmoil, helping to curb the yen’s sudden gains and remove a major threat to the equity rally.
As for key global catalysts, recent U.S. jobs data helped ease concerns about whether the Federal Reserve will loosen monetary policy quickly enough to avert a potential recession, and the world’s biggest technology companies are moving forward with plans to invest billions in artificial intelligence infrastructure.
“It’s not like we’ve had a major economic or financial crisis,” said Tetsuro Ii, chief executive of Commons Asset Management Inc., adding that it will probably take only two or three months for the market to fully recover. Investors now recognize that monetary policy in Japan and the U.S. has “entered a new phase” and have taken this as a signal to exit overcrowded positions.
The Topix index has fallen 12 percent since the end of June. Stocks that outperformed earlier in the year have suffered more. An MSCI index of the country’s semiconductor stocks – whose AI-fueled surge has been a key driver of this year’s rally – has fallen 25 percent in that period. An index of banks, which had risen sharply on expectations of higher interest rates, has fallen 16 percent.
“I wouldn’t call it a bubble, but the market just got carried away,” said Toru Yamamoto, chief strategist at Daiwa Asset Management Co. “When you have to reduce risks, the most inflated positions are unwound.”
Japan has become one of the most popular markets for global traders this year, amid expectations of a return to inflation after more than two decades of price stagnation and hopes that Japanese companies would return more cash to shareholders at the urging of the Tokyo Stock Exchange.
The recent slide has made share prices cheaper, potentially making them even more attractive to foreign investors such as Warren Buffett, who has pumped money into Japanese trading houses.
The Topix currently trades at 13 times forward earnings, compared to 20 times for the S&P 500 index. The Japanese chip index has fallen to 21 from 35 at the start of the year.
“People felt the market had gone up a little too much last month,” but with the wave of selling, “it came back to where it should be,” said Masayuki Murata, general manager of balanced portfolio investments at Sumitomo Life Insurance Co. At current valuations, “you could say we are at bargain-hunting levels.”
The derivatives market shows that sentiment toward Japan remains positive, with open interest for bullish Nikkei calls rising faster than for pessimistic puts. As a result, the put/call ratio has fallen to its lowest level in about six and a half years, suggesting that bets on a market recovery are becoming increasingly popular.
Risks remain, particularly from a strengthening yen as the BOJ continues to tighten monetary policy while the Fed eases. The currency’s fall to a decade low had helped stocks rallied as a cheaper yen is expected to boost profits for Japanese overseas exporters.
The geopolitical tensions between Washington and Beijing that took the wind out of the sails of technology stocks last month are still present, especially with the upcoming US election.
The Nikkei volatility index, Japan’s version of the “fear barometer,” closed at 45 on Friday. While that’s down from Monday’s high of 85, it’s still well above the long-term average of around 22.
For Ben Bennett, head of Asia investment strategy at Legal & General Investment Management Ltd., the crowded positioning became a reason to avoid Japanese stocks.
“The question is whether this over-positioning has been significantly reduced,” he said. “I suspect it will take more than a few days of volatility to bring this positioning back to neutral. If anything, I think investors who are bullish on Japanese equities may even add to their positions given the recent weakness.”
For Arihiro Nagata, managing director at Sumitomo Mitsui Banking Corp., the recent turbulence was no surprise given the multiple pressures on an elevated market.
“I think a correction was coming at every trigger,” he said. “It was hard to predict, but I think positioning has become easy and the market has become cheap.”
Most read by Bloomberg Businessweek
©2024 Bloomberg L.P.
