JPMorgan-Japan Equity Strategy Our visits with global investors 10 k...-108460408.pdf

GlobalMarketsStrategy30May2024JPMORGANwww.jpmorganmarkets.comEquityStrategyRieNishiharaAC(81-3)6736-8629rie.nishihara@jpmorgan.comJPMorganSecuritiesJapanCo.,Ltd.YongGuo,CFA(81-3)6736-8623yong.guo@jpmorgan.comJPMorganSecuritiesJapanCo.,Ltd.MansiDas(91)2261573343mansi.das@jpmchase.comJ.P.MorganIndiaPrivateLimitedWeheldmeetingswitharound60institutionalinvestorsinNorthAmerica,Europe,andAsiainMay.JapaneseequitiesbeganunderperformingUSandEuropeanstocksonalocal-currencybasisinMayandhavebeenunderperformingonaUSDbasissinceApril.MostoftheglobalinvestorswemetwithareneutraltoslightlyoverweightonJapaneseequities,withsomeadjustingtheirpositionsslightlyoverthepastmonth.Theyaskedavarietyofquestions,includingabouthowrapidyendepreciationandrisingJapaneselong-termratescouldaffectthestockmarket,factorsthatcoulddriveaturnaroundincorporateguidanceandtheoutlookforindividualsectors,wherecorporatereformlooksheaded,theimpactoftheChineseeconomicrecoveryonJapaneseequities,andthewillingnessofdomesticinvestorstoinvest.Theywereparticularlyconcernedaboutvolatilitycausedbytheweakyen,andthisappearstobeweighingonJapanesestocks.WethinkdownwardpressureontheyenissettopeakoutastheFedlowersratesandtheBOJraisesthem,andwithcorporatereformsmeanwhileacceleratingandconservativecompanyguidancelikelytoberevisedup,webelieveJapaneseequitiesarepoisedtoregaintheirresilienceinthesecondhalfoftheyear.Beloware10keydiscussionpoints.1.OutlookforrapidyendepreciationandimpactonJapaneseequitiesWesharedourviewthatthereboundinrealwagesexpectedbythemarketisbeingtestedbytheyen’srapiddepreciation(Basedonourcalculation,¥157/$isthebreakevenpointfortheimpactonJapaneseequitiesassumingaWTIcrudepriceof$83/bbl,butwecalculatethatthisbecomesaslightlylessworrisome¥170/$atthecurrent$80/bbl;Figure1).Weexpectweak-yenpressuretopeakoutoverthenextseveralmonthsastheFedlowersratesandtheBOJraisesthem,whichshouldalsohavetheaccompanyingdiscountforJapaneseequitiesreceding(Figure2).Eveniftheyendoesunwindtoahigherappreciationlevelinthefuture,itwouldlikelystillbeweakerthantheFY2023actualaverage(andFY2024corporateguidanceassumption)of¥144/$andthereforeunlikelytodepressJapanesestocks.2.AreweakeconomicindicatorsresponsibleforJapaneseequities’underperformance?SomeinvestorswereconcernedabouttheweaknessinrealwagesandpersonalconsumptiondataannouncedonMay9–10(Figures3–4),butwethinkthisistobeexpectedgiventheongoingdeclineinrealwages.ThemostrecentdataonrealwagesisasofMarchandthereforedoesnotreflectthewagehikesattainedinthisyear’sspringlaboroffensive,andwewillaccordinglybewatchingtheApril–JulydatasetforannouncementinJunethroughSeptember.3.Arerisinglong-terminterestratesnegativeforJapaneseequities?SectorallocationsTheriseinJGByieldsiscurrentlyacceleratingamidthe“highforlong”scenariointheUSandreducedJGBpurchasesbytheBOJ(Figure5).AmidagrowingviewthattheBOJwillinitiatequantitativetighteningassoonasthisJune,investorshavebeenbuyinginsuranceandbankingstocksandsellingrealestateandtechnamesinapatternweexpectwillcontinueforthetimebeing.However,withrealwag