Yen strengthens, but foreign investors bullish on Japanese stocks | Wilnesh News
A weaker yen has helped Japanese stocks hit record highs this year, but overseas investors believe there are still opportunities for these stocks even if the yen starts to strengthen. For much of this year, the weak yen has been the main bullish reason for foreign investors to focus on Japanese stocks. For example, it improves corporate performance at companies such as Toyota Motor. For investors holding Japanese assets denominated in yen, a weaker yen results in an increase in the value of their earnings. For a long time, a weaker yen seemed like a safe trade. From January 2021 to June 2024, the yen depreciated 55% against the US dollar. In June this year, it exceeded the 161 mark, the lowest level since 1986. The difference between interest rates and the US dollar – causing the currency to finally start to strengthen against the US dollar. Meanwhile, the Nikkei 225 Index fell more than 12% on August 5, its worst day since “Black Monday” in 1987. JPY= Yen rises sharply against USD YTD 2024 “Yes, there is volatility (now), but we are not shying away from it. In fact, we are embracing it and taking advantage of the liquidity provided by the market to expand our positions ,” said Julian McManus, portfolio manager at Janus Henderson. McManus isn’t the only one to increase his exposure to Japanese markets following the sell-off in early August. In the same week, Japanese equity funds saw their third-highest inflows this year, EPFR data showed. The impact of a stronger yen on profits Jefferies said that assuming global growth remains stable, the downward impact of a stronger yen on Japanese corporate profits will be limited. Jefferies strategist Shrikant Kale said that in the last four periods of “decisive” yen strength since 1995, the yen appreciated an average of 25% against the dollar. With this in mind, Kale expects a yen appreciation to around 120 to the dollar to cut earnings by 10% in the event of a soft landing. In this scenario, he added, the market would correct in a range of 9% to 14% in yen terms, but would actually rise 5% to 9% in dollar terms. Bank of America also believes that although the appreciation of the yen brings risks to corporate profits, the yen traded around the 156 level against the US dollar from April to June this year, and there are still sufficient savings. To this point, Janus Henderson’s McManus agrees that a stronger yen is not a cause for corporate profit concerns. He noted that most companies use the 145 yen level against the dollar as the basis for their full-year budgets this year, rather than a higher level. Therefore, even if the yen trades significantly weaker than its 2024 highs, the annual average rate will still be below the average rate assumed by companies. “We expect earnings growth in Japan to be higher than consensus, supported by nominal reflation and corporate reforms,” Morgan Stanley strategist Daniel Blake wrote in an Aug. 17 note. At 10-11%, we believe this growth will not be disrupted by recent volatility. Earlier this year, a weaker yen hurt stock prices in USD terms, even as the Nikkei 225 index climbed to record levels. Prior to the strength, “Japanese investors may benefit because their lives and portfolios are denominated in yen. But for foreign investors, it is more challenging because you cannot convert the yen value of Japanese stocks into Rising value Peter Perkins, partner at Macro Research Board Partners, said: Therefore, a stronger yen will help overseas investors realize gains as the Japanese market continues to rebound and the Nikkei 225 Index has recovered from the August 5 sell-off. , up nearly 15% so far this year. .N225 Year-to-date 2024 Historical trends in the Nikkei 225 index support the case for Japan to outperform in periods of strong yen, Jefferies said in the past four yen strengthening cycles. , the MSCI Japan Index fell more than 7% in yen terms, but rose 24% in dollar terms, even outperforming the MSCI All Country World Index by 24%. Jefferies said: “This shows that if the cycle is heading toward continued strength in the yen. Period, global investors should overweight Japan. Bank of America predicts a “full recovery” in stocks by the end of September or October, and expects stocks to trade near March highs by the end of the year. Perkins noted that despite rising volatility in the yen, the yen remains relatively cheap. He added Before the Fed started raising interest rates, the yen was trading at 103 against the dollar, Perkins said, and the market considered the yen’s fair value to be 120. Perkins said investors should now look to gradually increase exposure rather than hoping for a more stable yen. Hold on. “Certainly, the move from 163 to 147 is a reminder that things can change relatively quickly… Gradually increasing exposure and exploiting any perceived weaknesses is the right thing to do,” he said. To be sure, external shocks or threats to Japan’s economy or global growth could threaten the outlook, Perkins added. “It’s possible that this could happen, but we don’t see any reason to believe it will,” he said. “It’s an unknown and you can’t run an investment strategy while constantly worrying about the unknown.”
