The Japanese stock market kicked off the August market with a record three-day decline, causing its market value to drop by $1.1 trillion at one point. However, for some bullish investors, this actually provides them with a new reason to buy this one of the hottest trading assets of 2024.
Many industry insiders have talked about the advantages that Japanese stocks currently have after a sharp decline in the past few days:
The stocks that have been hit the hardest are those that once soared the craziest, and their prices have fallen back to more attractive levels;
The valuation improvement campaign to improve the international attractiveness of Japanese stocks continues, and this round of sharp decline has eliminated some foam for this market with an overall market value of $6.1 trillion;
Although the Bank of Japan's interest rate hikes and balance sheet cuts last month caught some traders off guard, the central bank "surrendered" last week and stated that it would not tighten monetary policy too quickly to avoid further market turbulence. This helps to curb the sudden rise of the yen, while also eliminating a key threat to the stock market rebound.
In terms of the global external environment, the latest US labor market data (initial request last Thursday) helps alleviate concerns about potential recession risks in the United States;
Meanwhile, major technology companies around the world are still intensifying their plans to invest billions of dollars in building AI infrastructure.
Regarding this, Tetsuro II, CEO of Commons Asset Management, stated that this does not seem like a major economic or financial crisis. Investors have now realized that the monetary policies of Japan and the United States are entering a new phase and have used this as a clue to exit their previously crowded positions.
Bottom fishing funds are eager to move
Data from the derivatives market shows that many market traders still have a positive view of Japanese stocks. The number of open contracts for call options on the Nikkei 225 index is increasing faster than that of put options. The put/call option ratio has fallen to its lowest level in about six and a half years, indicating that bets on a market rebound are becoming popular.
From the trend in recent weeks, the CSI index has cumulatively fallen by 12% since the end of June. Stocks that performed well at the beginning of the year were more affected during this round of decline: MSCI's Japanese semiconductor related stock index fell by 25% during this period, while the AI driven surge in chip stocks was the main driving force behind this year's rise. Bank stocks also rose sharply in the early stage due to expected interest rate increases, but also fell by 16% in this round of decline.
Toru Yamamoto, chief strategist of Daiwa Asset Management, said, "I don't think this is a foam, but the market has really been carried away before." He pointed out that when it is necessary to reduce risk exposure, the most inflated positions in the previous period will be cut off.
Earlier this year, the Japanese stock market became one of the most sought after markets for global investors, as people expected that after more than 20 years of stagnant prices, domestic inflation in Japan would resurface, and under the governance reform measures promoted by the Tokyo Stock Exchange, Japanese companies were expected to return more cash to shareholders.
Given that the recent decline has made stock prices cheaper, some industry insiders believe that this may be more attractive to overseas investors. For example, the "stock god" Buffett has repeatedly increased his holdings in Japan's top five trading companies in recent years.
A comparison of a set of valuation indicators shows that the forward P/E ratio of the CSI index is currently about 13 times, while the S&P 500 index is about 20 times. The forward price to earnings ratio of the Japanese semiconductor index has also dropped from 35 times at the beginning of this year to 21 times.
Masayuki Murata, General Manager of Balanced Portfolio Investment at Sumitomo Life Insurance Company, said, "People feel that the market rose a bit too much last month, and with the sell-off, the market has returned to where it should be. Based on the current valuation, it can be said that we are at a relatively comfortable level.
Of course, the risks in the current Japanese market still exist, especially if the Bank of Japan further tightens and the Federal Reserve turns to interest rate cuts in the future, leading to a continued strengthening of the yen. In the past few years, the decline of the Japanese yen to a decades low has helped drive the Japanese stock market higher, as the depreciation of the yen is believed to increase overseas profits for Japanese exporters.
The Nikkei Volatility Index, the Japanese version of the "panic index," closed at 45 points last Friday. Although it has fallen back from the soaring 85 points on Monday, it is still far above the long-term average level of around 22 points.
For Legal& For Ben Bennett, head of Asian investment strategy at General Investment Management, crowded positions are the reason he believes people are avoiding the Japanese stock market in this round of sharp decline. The question is whether this crowded position has been significantly reduced. I believe that to return to neutrality, it requires more than just a few days of volatility. But if the return is in place, I think investors who are bullish on the Japanese stock market may even increase their positions in the recent market downturn
Arihiro Nagata, Managing Director of Sumitomo Mitsui Banking Corporation, stated that the recent turbulence is not surprising given the various pressures faced by the market at a high level. He pointed out, "I believe that any triggering factor will lead to a correction. It's difficult to predict, but I think the current position has become very light and the market has become cheap enough