Bullish on the Nikkei 225, 'Japan Is Our Most Preferred Region' say Experts

The Nikkei 225 is an index showing how share prices perform among the 225 largest companies listed on the first section of the Tokyo Stock Exchange. It shares its name with that of an economics newspaper in Japan.

Currently, the Nikkei 225 is in bull market territory, up by more than 23% year to date. That is thanks in large part to money pouring in from foreign investors, including Berkshire Hathaway's Warren Buffett. He is the stocks and shares mastermind revered by many small investors. 

Many people consider the Nikkei's performance as a way to judge Japan's corporate success. However, experienced investors point out that it covers companies that are involved in a wide range of business activities worldwide. And it often moves up and down as a result of global events which have little to do with Japanese corporations. For example, American elections, or foreign wars. 

"Understanding the composition of an index is crucial for investors as it enables them to assess associated risks and make informed decisions. Additionally, it allows investors to align their investment strategy with their sector preferences. Or with the market outlook based on market capitalization and trading volume." That is the advice of Finance Magnates, a global provider of news and research for investors, based in Cyprus.

What Companies Have Done Well This Year?

"Investors scooped up individual stocks that reported positive earnings, which boosted the overall market," Maki Sawada told Reuters. He is a strategist at Nomura Securities.

For example, in May, shares in the cosmetics manufacturer Shiseido rose sharply after it posted a 97% jump in net profit for the first three months of 2023. In Japan, cosmetics sales have boomed since the rules on mask-wearing were relaxed in the spring. Nevertheless, the vast majority of Japanese people still choose to wear masks voluntarily.

The rise in Shiseido's shares coincided with the Nikkei 225 reaching its highest level in nearly 33 years. And the index has continued to edge higher through the first two weeks of June. 

Do Experts Think the Bull Run Will Continue?

The overall consensus is optimistic. "We believe that there are a lot of legs to this rally," Belita Ong, chairman at Dalton Investments, said on Bloomberg TV. "The reality is that the Japanese market has been cheap for a very long time and for good reason. Because management was not willing to share their profits with investors."

In her view, the bull run is about more than just impressive rises in profits at big companies. Corporate governance reforms are also regarded as a significant underlying factor. In addition, the economic environment in Japan currently favors investment in stocks, rather than, say, government bonds.

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Bloomberg conducted research among key professionals who manage investments in the Nikkei 225 and also invest in the Topix. The latter is more geared toward technology. 

The conclusion was that "strategists at Goldman Sachs Group to Macquarie Group say the case for a bull run is solid."

Morgan Stanley predicted that Japanese stocks will outperform their global peers. "Japan is our most preferred region, with improving ROE [Return-on-Equity] and a superior EPS [earnings per share] outlook." Those were the words of Chief Investment Officer Mike Wilson.

What About China? 

People who professionally invest in Asia often base their choices on countries' economic outlooks. Goldman Sachs chief Asia-Pacific economist Andrew Tilton commented in a recent research note. He said, "Amid China weakness, investors have looked elsewhere in the region for opportunities." And this means that Japan "is in the limelight."

It is becoming a widely held view that following the lifting of the so-called zero COVID restrictions in China, the economic bounceback has been much less impressive than predicted. Mr Tilton described investor sentiment on China as "rock bottom."

It's not only Japan that has benefitted. India's Nifty 50 index has rallied nearly 7% so far this quarter and pared all of its losses from its March low. Meanwhile, South Korea's Kospi index has risen 18% year-to-date. However, the Nikkei 225 is still regarded as the safest bet in the region due to Japan's very sound political environment. And the strong brands of the companies it contains, including famous names like Toyota and Sony.

What About the Yen? 

There's definitely a correlation between the values of shares on the Japanese Stock Exchange and the Japanese yen. One idea is that when the yen is weak, it makes shares look like a more attractive investment. For example, Adam Cole, chief currency strategist at RBC Capital Markets, spoke to the Marketwatch website in May. He said that "most of Japan's stock outperformance is a direct result of renewed weakness in the Japanese yen." And he further argued it reveals little about domestic policy or economic performance in Japan.

Michael Hall, Head of Distribution at Spectrum Markets, noted that Nikkei performed well after the Bank of Japan announced at the end of April that it intends to maintain ultra-low interest rates to support the export-oriented Japanese economy.

Headline writers on the trusted Kyodo News website always try to offer an explanation when the Nikkei 225 rises in value. In recent weeks, they have attributed its rise to various factors. There is the influence of gains on Wall Street and hopes for lower interest in America. And there's "dip buying" ー when investors buy on the perceived dip in an asset's value, in the hope it's about to rise again.

The variety of explanations suggests that complex factors drive the value of shares. And while it's possible to come up with a reason for a rise or fall after the event, guessing the direction of a share price on the stock market index is always going to be a gamble.

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Author: Duncan Bartlett, Diplomatic Correspondent

Mr Bartlett is the Diplomatic Correspondent for JAPAN Forward and a Research Associate at the SOAS China Institute. Read his other articles and essays.