Photographer: Akio Kon/Bloomberg

Topix Bulls Thought They Had This Fed Trade Down. They Didn't

  • Move to cash, says Amir Anvarzadeh, as yen gains after FOMC
  • UBS’s Ibayashi fears slower earnings growth, BOJ tapering

The bull case, it turns out, was too good to be true.

While many commentators expected last week’s Federal Reserve meeting to weaken the yen and boost Japanese stocks, the opposite came to pass. The currency strengthened the most against the dollar in almost two months as investors focused on signals for gradual future interest-rate increases rather than the one that day. As the yen’s resurgence stretched out for eight straight days, the benchmark Topix index headed for its worst week since early February, within 2 percent of relinquishing all gains for 2017.

“Given the huge influence the direction of the yen has on stocks, cyclicals in particular, we think investors should err on the side of caution and raise cash,” Amir Anvarzadeh, head of Japanese equity sales at BGC Partners Ltd. in Singapore, wrote in a note to clients late Wednesday.

By industry over the past six trading days, it’s easy to see the Fed’s hand at work -- and it’s not just the currency. Insurers and banks led declines among the 33 Topix groups as falling bond yields weighed on their profit outlooks. Carmakers, a currency play, weren’t far behind. The best shelters from the selloff were in fishery companies and a gauge of miscellaneous stocks, while defensive shares proved better bets than those tied to the economic cycle.

“We are a little bearish in absolute terms,” said Toru Ibayashi, head of wealth management research at UBS Group AG in Tokyo, stressing the bank is keeping its neutral position on the country’s equities in terms of global asset allocation. “When yen was at 102 to 103 per dollar, we expected a weaker currency and a corporate earnings rebound. That was why we were bullish. Now it’s the other way around.”

Ibayashi is bracing for Bank of Japan tapering over the next two fiscal years, which he sees boosting the yen and dulling company profit growth. Almost two-thirds of economists surveyed by Bloomberg are with him, predicting the BOJ will start scaling down stimulus by 2018.

Slowing Earnings

Sales dropped at Topix companies in the three months ended December, while operating profit gained less than 1 percent, according to Daiwa Securities Group Inc. estimates. The yen’s biggest quarterly decline against the dollar in more than two decades during that period -- predicated on the Donald Trump reflation trade -- spells better things for the three months through March, Ibayashi says. But with the Japanese currency gaining almost 5 percent against the dollar already this year, he doesn’t expect that to continue.

“The coming round of earnings guidance is way more important now because it may be weaker than market consensus,” he said. “It will make companies cautious about their forecasts when they think about what’s going to happen this year.”

Anvarzadeh says the yen may strengthen further after breaking a key technical level of 111.50 per dollar. The currency may keep rising until it reaches 107, he says. The Topix also fell below a closely watched level this week, its 50-day moving average, before recovering in Friday trading, when the gauge climbed 1 percent in the morning session.

Ibayashi, meanwhile, is certain about the Fed’s next steps, and more focused on the BOJ, which he sees cutting the annual bond-purchase target to 60 trillion yen ($539 billion) from 80 trillion yen sometime this year.

“Everybody knows the Fed will raise rates three times this year,” he said. “The BOJ, we don’t know.”

But if the past week is any guide, the surest assumptions of Japanese stock investors don’t always correlate with what comes next.

— With assistance by Yuko Takeo

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