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(Bloomberg) — Japanese stocks have outperformed their Chinese counterparts this year, but some investors believe the tide is about to turn.
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Headwinds are deepening for Japanese stocks, adding to the deteriorating global expansion and fears that the era of yen weakness that supported exporters’ gains is all but over as the central bank is forced to tighten policy.
On the contrary, optimism is developing that Beijing’s efforts for the local economy and stock markets will help end a crisis that has placed Chinese stocks among the world’s worst performers this year. Historically low valuations are also expected to attract second-hand fishermen.
“The relative outperformance over the next 12 months will come from countries like China or China-centric economies,” said Jun Bei Liu, fund manager at Tribeca Investment Partners Pty in Sydney. “Japan is an easy country” to fund the industry after its huge performance this year, he said.
Japan’s Topix index jumped 23% in 2023, heading for its most productive year in a decade, as the economic expansion accelerated and corporate governance efforts attracted investors. Meanwhile, China’s benchmark CSI Three Hundred Index fell 7. 4% as a faltering economy wiped out optimism about the country’s reopening from Covid restrictions and asset market suffering has yet to recover.
There are signs that Japan’s outperformance may have possibly peaked.
The Topix is already down more than 4% from its high of the year as global interest rate hikes worsen the outlook for external demand, hurting Japan’s trading powers. Export-dependent industries account for about a quarter of the index, a higher figure. share of China’s benchmark.
Japanese stocks are also affected by their maximum correlation with the S index
Another threat to Japanese stocks is the large positioning of global funds. Foreign investors bought $30. 7 billion in net local stocks this year through Oct. 27, the biggest buying year since 2013.
“The global budget has significant exposure to Japanese stocks, much more than in the past decade,” HSBC Holdings Plc strategists Herald van der Linde and Prerna Garg wrote in a research note last month. “There’s very little room to increase their holdings. “
The bank is underweight Japan and obese in mainland China, they said.
that of the yen
Any drop in Japanese stocks could increase if the yen starts to strengthen. The currency has plenty of room to appreciate, having fallen just around 13% this year and is near its lowest point in three decades.
Although the Bank of Japan disappointed yen bulls this week by changing its yield curve policy slightly, it has taken a step in that direction and a broader resolution would breathe life into the currency.
Among the bright spots for Chinese equities are the good earnings outlook. Companies in the CSI 300 index will see their profits grow by an average of 22% over the next 12 months, according to Bloomberg forecasts. This compares to just 5% for the Japanese Topix. Components.
Valuation signals also suggest that Chinese stocks have room to recover. The CSI 300 index trades at 10. 5 times forward earnings, below its five-year average of 12. 4 times. The Topix trades at 14. 3 times, in line with its five-year average.
“In the event of a correction, China will be more resilient than other Asian markets due to its soft positioning and reasonable valuations,” said Luca Castoldi, senior fund manager at Reyl Group in Singapore. Stay with America in the future, he said.
Reyl will increase his holdings in China while shorting Japanese stocks and selling long the yen, he said.
Choose Carefully
While there are many reasons why Chinese stocks outperform their Japanese counterparts, seasoned investors say the challenging investment environment still demands careful inventory selection.
“There are a lot of opportunities in the Chinese market because it’s a very deep market, but you have to continue to be selective,” said Fabiana Fedeli, head of leading equity, multi-asset and sustainability investments at M
“Winnie Hsu’s. “
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