PSA Japan Market Strategy – Will the Market Slump in January?

Japan Market Strategy – Will the Market Slump in January?
With the Japanese stock market on the up and up, the big question – though not necessarily one on all that many minds – is whether this is a seasonal rally, or whether it is structural. Invariably under Abe, and more often than not, during the quantitative easing (QE) era (2003~?), Japanese equities have gone up in the fourth quarter. However, on two occasions, 2014 and 2016, they’ve slumped as we’ve moved into the new year, more than offsetting the fourth quarter gains. Given that Kuroda wasn’t in situ in January 2013, and so QE as we know it today was a mere promise rather than a presence, that’s a 50% fail rate.
As a general rule, Japan’s monetary base contracts at the start of the year. Bonuses paid out in December, quarterly accounts, and the fact that January is a poor month for both domestic and international trade, all compete to drag down money supply early in the year. Following on from the liquidity bonanza of the fourth quarter, this represents quite a swing in a key Japan stock market liquidity indicator, and one that, in the QE era, has ended up being reflected in share prices. Since 1Q 2014, i.e. ever since Kuroda has been running monetary policy, the Japanese stock market has, at best, marked time in the March quarter; and in both 2014 and 2016, the technical shift in domestic liquidity was compounded by selling from foreigners, creating a “hunt the buyer” situation in the market.
Traditionally, then, the question of whether the market will go up or down next quarter depends on the attitude of foreign investors, and as this can turn on a sixpence, it is not all that practical to try to predict it three months out. However, one thing that does appear to be different this time round is monetary base expansion, which is slowing considerably.
Key Points

• Monetary base moves
• Market likely to overheat
• Earnings performance vs expectations
• Undemanding valuations
• PSA’s base scenario
• Sector weightings to consider
• Sector themes to consider