Japan’s economy should not be majorly affected by the coronavirus outbreak, according to Société Générale research, while an opportunity to invest in Japanese equities could open up.
“Despite the latest coronavirus outbreak, we expect Japan’s economic fundamentals to hold firm,” the French banking group said in its latest monthly macroeconomic commentary. “The frontloading of consumption and investment ahead of the October consumption tax hike was not significant.”
Japanese equities
The Nikkei index rose 2% in the first half of January before falling 3% from 17 January, Société Générale noted. Japanese equities lost 2% in January, underperforming developed markets (-0.3%) but outperforming emerging markets in Asia (-3.9%).
The sectors hit worst by the market sell-off in the latter half of January were: electric appliances (-4.1%), machinery (-4.1%) and transport equipment (-3.4%), according to Société Générale.
Stocks with exposure to China, either through suppliers or customers, underperformed the markets – for example, Murata Manufacturing (-6.2%), Hitachi (-8.6%) and Honda Motor (-8.6%) – though Toyota has remained resilient, dropping -1.5% since the outbreak and -0.8% in the month.
At the same time, cross-asset research by Société Générale, which stress-tested portfolios on the coronavirus risk, assessed a potential opportunity for Japanese stocks. “In our view, it is too early to call a generalised ‘buy the dips’, given the news flow on the virus is currently anything but reassuring,” the firm noted.
“That said, we would view material weakness as a potential opportunity to raise exposure to Japan equities – after all, they are no longer burdened by the risk of potentially fast yen appreciation, which investors had been fearing previously.”
Tourism industry
While the SG Japan ‘domestic’ and ‘construction’ baskets – which are geared to the domestic market, consumption and investment – have outperformed, the SG Japan ‘tourism’ basket, which is dependent on spending by Chinese tourists, has been a major underperformer, Société Générale said.
Markets have started to worry about the impact of reduced tourist flows on the domestic economy, Société Générale found, but it expected the tourist basket “to benefit from the equity market rebound once the virus is contained”.
“Chinese tourists accounted for around ¥1.8trn (€15bn) of tourism spending in 2019, which translated into roughly 0.3% of Japan’s GDP,” it added. “If the current outbreak continues and tourism to Japan declines further, the impact could therefore reach a maximum level of around 0.3% of GDP.” Société Générale went on to suggest this represented a much lower impact than after the Tohoku earthquake in 2011.
Growth expectations
Overall, Société Générale concluded, the immediate impact of the latest outbreak of coronavirus on the domestic economy should prove limited. It expected stable growth for Japan in 2020, at a potential rate of 1%, with growth drivers increasingly shifting to domestic factors, such as consumption and investment, while external demand remains limited.
The firm also expected fiscal policy to remain accommodative throughout 2020 but suggested more fiscal stimulus could be implemented if signs of a potential economic slowdown were to strengthen.
“Our central scenario continues to be that the Bank of Japan (BoJ) will not make any policy changes until sometime in 2021, once it has seen the effects of the October 2019 consumption tax hike and the 2020 Tokyo Olympic Games,” Société Générale said. “It will likely wait until some time in 2022, after the 2% inflation target has been achieved, before adjusting its negative interest rate policy.”
Sentiment and fund flow data
This comes as Last Word Research has found that European fund managers’ sentiment towards Japanese equities has been on the rise since the end of 2019 while fund flows have also been improving over this period (see charts below).
Source: Last Word Research
Source: Morningstar data
