- The good YTD Topix performance has recently been halted. In part this is due to a higher risk aversion and pause in rotation into Value and Cyclical sectors.
- This pause is also due to the BoJ’s affirmation of its yield curve control (YCC) policy which will maintain the 10-year yield at bay, representing a limiting factor for Japanese banks and Value-Cyclical sectors in general.
- Finally, by the end of the month, firms will release dividends, but retailers are anticipating capital gains realisation in order to maximise tax advantages.
- Such issues may eventually prolong the weakness, but we think the Topix rally still has legs. The Value-Cyclical rotation is advanced but not exhausted yet and the BoJ in the end aims to ensure a complete reflation of the economy before letting yields rise. It will also start buying Topix ETF
instead of Nikkei ones.
- A further rise in US yields, a still strong GDP momentum and higher inflation expectations represent a positive mix for a Value-Cyclical index as the Topix.
- Valuations are still attractive in relative terms and our proprietary country score based on expected earnings growth (among other valuation measures) still places Japan as one of the best globally.
- In sum, we recommend maintaining an overweight position on the Topix..