July 19 2024: Japanese stocks could encounter significant volatility this summer, according to Bank of America (BoFA) analysts. This volatility stems from speculation over a potential Donald Trump presidency and expectations of lower U.S. interest rates.
Sources of Volatility
Uncertainty regarding the Bank of Japan’s (BOJ) plans to raise interest rates is another key source of volatility for Japanese markets. An early rate hike by the BOJ could lead to yen appreciation, further unsettling the markets.
Shift in Market Dynamics
Recent sessions have seen a global shift towards more economically-sensitive sectors, driven by expectations of lower U.S. interest rates. This trend has spilled over into Japanese markets, with traders favoring mid-to-small capital stocks over major large caps.
The “Trump trade” has further fueled this shift, with expectations of a second Trump presidency prompting a move out of technology stocks and into growth-sensitive sectors. “The perception that Trump’s policies would stimulate the economy has further amplified this reversal in stock selection,” BoFA analysts noted.
Performance of Japanese Stocks
Major large-cap stocks, particularly in the technology sector, have been the main drivers of Japan’s stock market over the past year. The Nikkei 225 recently reached a record high above 42,000 points, and the TOPIX also hit new peaks in July. Despite recent sharp declines, both indexes are still up about 20% in 2024.
Investment Strategies
BoFA expressed caution about making a substantial shift out of technology stocks but recommended focusing on stocks sensitive to domestic demand. For Japan, BoFA advised picking mid-cap stocks over small-caps, while maintaining a preference for large-cap stocks among investors.
The brokerage downplayed the likelihood of higher interest rates resulting from a Trump presidency, citing different economic conditions during his first term. However, analysts acknowledged that the U.S. presidential election outcome remains uncertain.
Outlook for Japanese Markets
BoFA anticipates that after a potentially volatile July-September period, Japanese markets are more likely to rise in the October-December quarter, “when visibility will be clearer on the BOJ, the Fed, and the U.S. presidential election.”
BoFA expects the BOJ to hike rates by 10 basis points in its end-July meeting.