Japan Nikkei and China SSE

Since the post on where to put my money now on 28 Novermber 2015, the stock indices of both China and Japan, being SSE and Nikkei 225, had advanced between 16.8% and 18.4% respectively. In fact, China’s SSE had reached a high of 5023.10, which would mean that the index would have advanced 59% at that point.

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Realising the instability of the SSE, advancing at such a great speed of more 100% within a year, I decided to pull out the China related unit trusts and index funds on 19 June. Perhaps, lady’s luck was on my side, I managed to evacuate in the nick of time at the first sign of trouble to evade the stock avalanche in the last few days. In fact, I had mentioned during the invited panel discussion at Singapore Investors’ Association, Singapore (Sias) on 9 May 2015 that investors should start to be careful about China stocks. In a market swarm by margin financing and thousands of accounts opened by new investors everyday, it is time to be wary. When a market is not supported by fundamentals, it is an easy-to-come and easy-to-go situation. The speed of funds going out of the market will be as easy as funds getting into the market, leaving a lot of inexperienced players holding on to stocks bought at high prices. The sky-high individual stock prices will take many years to reach again if they ever exist several years down the road. As for me, hopefully, it can be a second time right to get back into China market when the dust has settled.

As of now, I take a different view of Nikkei 225. Whilst I read about the article on interview of Mr Daniel Chan, MD DCG Capital, that the fund is not invested in Japan http://business.asiaone.com/news/asean-shines-investor-destination, I begged to differ. Yes, it is true that Japan has high goverment debts and structural issues that caused the economy to be in the doldrums for more than 25 years, my gut feel then was that the Japanese market might have bottomed and was to be heading higher. Since September 12, 2014 when the interview was published, the Nikkei 225 index advanced from 15885 to 20539 as of yesterday, an advance of 29.3%. In fact, I think the Nikkei will either continue to advance, or in the worst case, stay just around 20,000 level for the next few months and possibly till the end of the year, barring black-swan events.

Several reasons I believe help to support the Japanese stock market are:

1.   Abe’s administration has been leaning towards cheap monetary policy. Consequently, the Japanese yen has been low against the US dollars. In fact, many Japanese companies that have been investing in China for many years are now movng back or planning to move back to Japan to take advantage of the low Japanese yen. These Japanese companies invested in China years ago was to benefit from the cheap labour and the vast consumer market. However, it looks like China’s cheap labour is no longer cheap compare to many Asean countries and there is less incentive to continue to invest in China. Of course, that being said, it does not mean that Japanese companies will move out of China in herds and droves due to its vast consumer market.

2. The Japanese economy imploded in the late 80s was due to property bubble burst at that time. With a passage of time of more than 25 years, many foreign countries, including many Singapore companies, are now buying up properties in Japan. The fact that the Nikkei stock market has been lying low during all these years was that the households are not investing. In fact, up until last year, many indivdual preferred to invest their money in low-yield instruments such as bonds. This has been the result of the deflationary mindset of the people. To me, it is households rich and government poor situation. With property price helped by foreigners, it should be a question of time that the ‘feel-good’ factor returns and this would be positive for the economy and the stock market. Certainly, there will be structural problems as Japan has been a rather ‘closed’ economy up until the 90s, but I believe it should be in biased towards a positive direction as confidence appeared to be coming back.

3.  Commodity prices, including crude oil, have been low in US$ terms. This should benefit resource-scarce economy like Japan. Of course, the weakness in Japanese yen has a negative effect, it still helps when commodity price is low.

(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

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