(Bloomberg) — Tensions in the Middle East and currency fluctuations are dampening Japan's record stock market gains, but the weakness is expected to be temporarily buoyed by strong company fundamentals and long-term prospects for artificial intelligence. It seems to be something like that.
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This is the view of Koji Nakatsuka, chief investment officer for Japanese equities at Allianz Global Investors, which manages $2.4 trillion in assets around the world. “If everything normalizes, the Japanese stock market could rise towards the end of the year. The Nikkei average could return to its all-time high by the end of the year.”
Japanese stocks are nearing a technical correction after soaring to record highs earlier this year as traders reduced bets on the Federal Reserve cutting interest rates. This spurred the dollar's appreciation once again, putting pressure on the yen, which had depreciated to nearly $155 against the dollar. The levels have raised concerns about possible intervention by authorities and prompted warnings from Wall Street brokerages at a time when rising geopolitical stress is prompting a flight to safety.
Mr. Nakatsuka said that while the yen is likely to depreciate to 155-158 yen per dollar, “many market participants are already anticipating government intervention, so they are unlikely to continue buying dollars and shorting the yen.'' It's difficult,” he said. Domestic-oriented small-cap stocks, which benefit from the strong yen, will begin to catch up with the large-cap stocks that have led the rally over the past year.
He added that small-cap stocks often have more niche companies with unique AI expertise, and that the corporate transformation campaign will eventually expand to small and medium-sized enterprises in the country. The small-cap index has returned just 6% over the past year, lagging the 35% return of the large-cap index.
Nakatsuka said crude oil prices have continued to rise after hitting this year's high in early April due to rising tensions between Israel and Iran, especially for fine chemicals, which import basic raw materials in dollar terms. Growth stocks such as companies are “very vulnerable,” he said. “Input costs are so high that profitability can be under pressure.”
Meanwhile, uncertainty over China's economic recovery trajectory prompted Allianz to reduce its stake in Japanese stocks since last year given its exposure to Asia's largest economy, which includes steel, factory automation and machinery companies. “I think it was the right decision,” he said. “This is a structural problem that may take years to recover.”
Even after the Bank of Japan lifted its negative interest rate policy last month, asset managers remained overweight to banks and developers, despite their poor performance in past rate hike cycles. “Previously, the best time to sell bank stocks was when the Bank of Japan raised interest rates. However, as the Bank of Japan is likely to raise interest rates again in the second half of this year, I decided to continue holding financial instruments this time.” Stated.
The next trigger for Japanese stocks will be first-quarter results in the coming weeks, and tech stocks are likely to perform better, he said. “Even without a weaker yen, AI-related companies and electronic component companies should see a slight positive return to profits. And automakers' momentum is improving in the long term.”
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