Morgan Stanley, a leading investment bank, is expecting the Japanese Topix to increase by close to 15% by mid of 2020. As per a report published last week, it says that the Japanese stocks are the opposite of American stocks. While the American stocks are loved, the Japanese stocks are ‘oversold and unloved’ and have never been sold cheap. The Nasdaq and the S&P 500 companies have posted better than expected results, and thus the stocks have reached great highs this year. Compared to that, Japan has had a bad couple of years with the Japanese economy slowing down due to the US-China trade war and its export and factory output falling.
The USD and the Japanese Yen have also been considered as a determinant of the risk in the market. For example, when the market is considered to be at risk, the Treasury bond yields will increase, and the interest rates fall. Yields have an inverse correlation to the USD/JPY and indicate volatility of the market. With Yen being a premier funding currency, in case the market is in a panic the Treasury bond prices will rise, yields will fall, US dollar will go down, and the USD/JPY will increase. The Japanese stocks are at an all-time low while the US stocks at all-time highs. Japan’s Topix has fallen by 14% when compared to the S&P 500, which is 5.65% higher than last year and the NASDAQ at 12% higher than in 2019. Thus the US and Japan have the opposite images as per the Stanley report.
The slowing Japanese economy least perturbed the bank as it was optimistic that if the Chinese economy improves, Japan will follow suit. It also said that the earnings report should be revised as and when there is an improvement in Chinese data, and moreover, there is speculation that the sales tax revision from 8% to 10% that was to happen in October is not likely to happen which will lift the Japanese economy. Morgan Stanley said that it prefers Japan over Europe despite its equities being undervalued. The reasoning the bank gave behind this preference is that if the US imposes auto tariffs in Europe, the investors would prefer to invest in Japan than in Europe for its auto parts. It said,
Although Europe and Japan can both be classified as being both unloved and undervalued, we prefer the latter as we feel that it offers a better potential earnings and profitability story and more compelling undervaluation.