Equities Weekly: Japan Equities - Select Opportunities in Semiconductors and Financials
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Chief Investment Office12 Jun 2024
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Japan equities: Select opportunities in semiconductors and financials. Although yen weakness has driven positive performance for Japan equities in the first quarter, it is starting to cause problems for Japan as it accelerates imported inflation, hinders real wage growth, and complicates the Bank of Japan’s (BOJ) effort to normalise monetary policy and make the historic shift to an inflationary economy. Against this backdrop, we maintain a neutral stance on Japan as the market, previously driven by “Kishidanomics”, is likely to take a pause, shifting towards themes that generate alpha. These themes include:

  • Semiconductor sector. We continue to emphasise the semiconductor sector as a major beneficiary of global AI adoption, driven by the ongoing race for chip security. Japan is focusing on localising semiconductor manufacturing to prevent supply chain disruptions and enhance resilience, ensuring a reliable supply of chips for local companies, including automakers and other businesses reliant on semiconductors. Japan has allocated JPY3.9tn, or 0.71% of its GDP, in supplementary budgets for the semiconductor industry.
  • Financials. Banks remain the best investment opportunity in the context of the reflation story and interest rate normalisation. Following the termination of yield curve control and the potential end to Japanese Government Bond purchases, as well as possible quantitative tightening, bond yields have been rising steadily. This trend points towards a growing confidence that BOJ Governor Kazuo Ueda is under increasing pressure to further normalise rates and address the yen’s weakness. Increased economic activities by way of boosting lending should improve banks’ bottom line with NIM expansion, stronger loan growth, and fee income.

Equity fund flows:
The week ended 5 June witnessed net inflows into both Emerging Market (EM) and Developed Market (DM) Equity Funds as the European Central Bank delivered a widely anticipated interest rate, its first in five years. US Equity Funds saw inflows of USD4.6bn, while Europe and Japan saw outflows of USD969mn and USD750mn respectively. Within the EM bucket, flows into China Equity Funds were insignificant (USD122mn) whilst India, Mexico, and Brazil Equity Funds all pulled in sizable AUM.

Figure 1: Yield curve and Japan financials relative performance

Source: Bloomberg, DBS

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