(Bloomberg) — Japanese equities shed $1.1 trillion in value as they started August with a record three-day loss. For bullish investors, this gives a new reason to buy what is one of the hottest trades of 2024.
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The hardest hit stocks are the top ones, which causes prices to drop to more attractive levels. The valuation campaign that has boosted the international appeal of Japanese stocks continues apace, and some of the foam has been removed from the current $6.1 trillion market.
When the Bank of Japan’s sudden interest rate hike last month caught traders off guard, the central bank followed up with comments that it would not tighten so quickly as to risk further market turmoil. It helped to cover the sudden gains in the yen, removing the main threat to the stock rally.
In terms of key global catalysts, the latest US labor market data helped ease concerns about whether the Federal Reserve has done enough to stave off a potential recession. And major tech companies around the world are pushing ahead with plans to spend billions on artificial intelligence infrastructure.
“It’s not like a big economic or financial crisis,” said Tetsuro Ii, chief executive of Commons Asset Management Inc., adding that it may take two or three months for the market to fully recover. Investors now recognize that monetary policy in Japan and the US has “entered a new phase,” having taken this as a cue to exit crowded positions.
The benchmark Topix is ​​down 12% since the end of June. Stocks that outperformed at the start of the year have seen more gains. Stock MSCI Inc. of the country’s semiconductor-related stocks — whose AI-fueled surge has been a key driver of this year’s rally — has fallen 25% in the range. The size of the banks, which had increased in anticipation of higher rates, fell 16%.
“I wouldn’t call it a bubble but the market just got carried away,” said Toru Yamamoto, chief strategist at Daiwa Asset Management Co.
Japan has become one of the favorite markets of global traders this year amid expectations that inflation will return after more than two decades of price stagnation and hopes that Japanese companies will return more cash to shareholders with a boost from the Stock Exchange. Tokyo stocks.
The recent slide has made the stock cheaper, potentially making it more attractive to overseas investors such as Warren Buffett, who has poured funds into Japanese trading houses.
Topix currently trades at 13 times estimated forward earnings, compared to 20 times for the S&P 500 Index. Japan’s chip gauge fell to 21 times from 35 times earlier this year.
“People felt the market had risen too much in the past month” but with the sell-off “it’s back to where it was,” said Masayuki Murata, general manager of balanced portfolio investments at Sumitomo Life Insurance Co. At the current valuation, “you could say we’re at a low hunting level.”
Derivatives markets showed sentiment remained positive in Japan, with open interest in bullish Nikkei calls rising faster than bearish ones. As a result, the put/call ratio has fallen back to its lowest level in about six and a half years, suggesting betting on a rebound in the market is becoming popular.
There are still risks, especially from strengthening if the BOJ tightens further during Fed ease. The currency’s decades-long slide has helped push stocks higher, as a weaker yen appears to boost Japanese exporters’ profits from overseas.
The geopolitical tensions between Washington and Beijing that took the wind out of tech stocks last month remain, especially with the US election looming.
The Nikkei Volatility Index, Japan’s version of the “fear gauge” closed at 45 on Friday. While it is down from Monday’s intraday spike of 85, it is still above the long-term average of around 22.
For Ben Bennett, head of investment strategy for Asia at Legal & General Investment Management Ltd., the crowded position is a reason to avoid Japanese stocks.
“The question is whether this long position has been significantly reduced,” he said. “I suspect it will take a few days of volatility for the positions to return to neutral. If anything, I think investors who are bullish on Japanese equities may add to their positions due to the recent weakness.”
Given the various pressures on the market at higher levels, the latest turbulence does not surprise Arihiro Nagata, managing director at Sumitomo Mitsui Banking Corp.
“I think the correction is waiting to happen whatever the trigger is,” he said. “It’s hard to predict, but I think the position is light and the market is cheap.”
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