Remain positive on Topix despite recent weakness

In Short

The Topix had a strong start into the year, outperforming both the S&P500 and the MSCI EMU. Since March 17th this strong performance slowed down, in part due to a pause in the rotation into Value and Cyclicals which had negative spillovers into Topix.

Highlights:

  • 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..

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Remain positive on Topix despite recent weakness

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