The Tokyo Stock Exchange fell behind due to four technological leviathans


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Update of Asia-Pacific stocks

While most of Japan spent August thinking about Olimpic games, heat and rage Delta variant, some sweated across the two lines that crossed the market screen.

Summer is now over and, to Japan’s chagrin, four U.S. technology companies together are worth more than the entire Topix index, or all 2,187 companies on the Tokyo Stock Exchange’s main board.

TSE is in good company and the quartet behind this turnaround is well known: at more than $ 7 trillion, the combined market capitalization of Apple, Alphabet (Google), Amazon and Facebook, or BLUNDER, usually mocks any opposition to other companies and markets. Apple and Facebook together are worth more than FTSE; Only Amazon is higher than the entire German Dax index. In this context, and in the global portfolio management budget, the $ 6.8 billion Topix was just the latest international benchmark to move from GAFA’s penumbra to a total eclipse.

Overcoming Tokyo, however, felt epochal — a moment, especially for those obligated to discuss Japan’s increasingly important investment importance in the post-abenomination era — to come together and decide what solutions might work when the center of gravity seems so resolute elsewhere. The fear of absenteeism is embedded in the fading memories of the more glorious times of the late 1980s, when TSE-listed companies accounted for about half of the world’s market capitalization, and Japanese banks accidentally overshadowed Exxon and General Electric.

Although the current performance of Japanese stocks may seem superficially healthy on its own terms (Topix closed on Wednesday at a five-month high), Japan’s MSCI index this year was below US and European success by 19 and 14 percentage points, respectively – or, as noted by the brokerage the Jefferies house, close to the worst record in 20 years.

Even without this evidence, a large number of observers believe that a significant block of the Japanese corporate list is deeply underestimated compared to global companies. They can see the growing gap between earnings and valuation and have become less sure which narrative or catalyst could sustainably cause it to narrow, let alone disappear.

One theory is that the abrupt tying of a new and potentially political risk that could destroy the valuation of Chinese stocks could create a rotation of global portfolio money from that threat and toward the visible stability of Japan’s earnings.

Meanwhile, despite the significant level of vaccination, Japan’s prospects for recovery after Covid are not sufficiently rooted as the idea that it has become a clear signal to buy.

Nearly 41 percent of Topix shares are trading below pre-Covid levels, compared to 17 percent of shares in the S&P 500, analysts note. The GAFA / Topix crossover spectacle also coincides with the natural onslaught of post-Olympic blues: the games did not bring the expected economic buzz and may have prolonged the pandemic. Because of this situation, Prime Minister Yoshihide Suga looks weak, and his political future and reform plan are in doubt.

Jefferies strategist Shrikant Kale argues that all this gloom hides numerous signals that Japanese stocks – partly due to this year’s poor performance – are poised for a noisy return from now until the end of the year.

Seasonal factors, which include a consistent tendency for the yen to weaken and yields on ten-year treasuries are rising from September to December, will be a strong driver that they have historically proven. In addition to those winds, Kale says, a growing ratio of fully vaccinated adults in Japan — now above 43 percent despite a late start — should trigger a series of gatherings in so-called “return stocks” that have dominated the U.S. markets in recent months.

Once momentum is reached, global investors can take a closer look at Japan’s fundamentals, which according to Kale include a leading global recovery in corporate profitability and an extraordinary quarter of Japanese earnings in the three months ended June. A record 76 percent of Topix companies exceeded consensus forecasts.

Two lines of valuation – four U.S. shares of GAFA versus Topix – could prove permanently crossed. Many will choose that the distortion lies in the extreme rise in the value of American leviathans: a more direct distortion for investors may lie in the undervaluations that spurred their growth.

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