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Is the Japanese equity rally losing steam?

Joel Le Saux, manager of the Japan opportunities fund at SYZ Asset Management, argues the Japanese equity rally won’t last.
Is the Japanese equity rally losing steam?

Following prime minister Shinzo Abe’s re-election, the Japanese stock markets have seen a rapid influx of foreign investors. However, Le Saux is convinced the rally is of a “low quality” because it is based on momentum’ rather than fundamentals, sister publication Portfolio Adviser reported.

Describing the current economy, he explained that Japan is still going through an economic recovery, the longest period since World War Two.

He said: “The job market is really strong with an increased number of women working, inflation level is mild, headline CPI is around 1% and GDP has grown by 1.5% per annum. This is a great achievement.

“But it’s a bit of a coincidence. All this momentum for the domestic economy coming in, just when Abe came in to power five years ago is just by chance. The initial phase of the market gain was just a recovery of very depressed valuations for the market.”

Le Saux went on to explain that it is because of the foreign investors that the Japanese market is looking favourable, but this doesn’t give the full picture.

He stated that last year, at the end of the summer, Japan was selling at over 10% discount to European equities (Stoxx 600), but it has now gained 9% and is trading in line with EU equities.

As a result, the number of foreign purchasers of Japanese equities hit its highest ever level in October last year,

“But this is abnormal,” added Le Saux. “These foreign investors are momentum players who purchase aggressively and whenever there is a turnaround in earning, they will sell.

“Therefore, I would qualify that this last quarter rally is of not good quality and won’t last.”

He said that as a Japanese fund manager, he, like others, would much prefer this market to be purchased by Japanese residents to boost the domestic economy.

Bank of Japan

Le Saux added that the Bank of Japan (BoJ) have also continued to buy this market to support it but argues it’s something they shouldn’t be doing.,

Stating that the bank is in denial of the economic conditions, he continued: “BoJ has no ammunition left and they need it because if we have a recession next year, or in two years’ time, they will be able to do nothing because they’ve used all their money.

“They need their tools in case of adverse conditions.”

Part of the Mark Allen Group.