Japanese stocks are expected to experience significant volatility over the summer, according to Bank of America (BoFA) analysts. This uncertainty is driven by multiple factors, including speculation about a potential second term for former U.S. President Donald Trump and the implications of changes in U.S. and Japanese monetary policies.
Key Factors Contributing to Volatility
“Trump Trade” and U.S. Interest Rates
Economic Sensitivity Shift: There has been a global shift towards more economically-sensitive sectors, driven by expectations of lower U.S.
interest rates. This trend has influenced Japanese markets, with traders moving away from large-cap technology stocks and focusing more on mid-to-small-cap stocks.
Trump Presidency Speculation: Growing expectations of a second Trump presidency have amplified the “Trump trade.” The belief that Trump’s policies would stimulate the economy has further driven this shift out of technology stocks and into growth-sensitive sectors.
Bank of Japan (BOJ) Policy Uncertainty
Interest Rate Speculation: Uncertainty over the BOJ’s plans to raise interest rates is another source of volatility. A potential early rate hike could lead to an appreciation of the yen, adding further complexity to the market environment.
Rate Hike Expectations: BoFA expects the BOJ to increase rates by 10 basis points in its end-July meeting. However, the impact of this move on Japanese stocks remains uncertain.
Market Performance and Outlook
Recent Performance: Major Japanese indexes, such as the Nikkei 225 and TOPIX, recently reached record highs but have since fallen sharply. Despite these recent declines, both indexes are up approximately 20% so far in 2024.
Future Expectations: BoFA suggests that while caution is warranted, it is sensible to consider stocks sensitive to domestic demand. The preference should be for mid-caps over small-caps, with large-cap stocks likely to remain favored by investors.
Outlook for the Rest of 2024
Potential Volatility: BoFA anticipates potential volatility from July to September. However, they forecast a more stable and potentially positive market environment from October to December, once there is clearer visibility on the BOJ’s policies, the Federal Reserve’s actions, and the outcome of the U.S. presidential election.
Investment Strategy
Stock Selection: Investors are advised to remain cautious about shifting out of technology stocks entirely. The focus should be on selecting stocks that are sensitive to domestic demand and considering mid-caps over small-caps.
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