Market Watch: Japan stocks reach 33-year high


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Team Asset Management present their weekly round-up of global markets

GLOBAL stocks edged higher last week, although a deal to raise the US debt ceiling remained elusive, as rival political factions dug in and expressed little appetite for compromise.

The uncertainty has taken some momentum out of this year’s rally but Japan’s Tokyo Price Index, better known as Topix, outpaced most major global indices and climbed to a 33-year high.

The bursting of Japan’s historic asset-price bubble in 1990 left many investors scarred, as have the false dawns pointing to recovery in the period since. The Topix remains almost 25% below its peak set on New Year’s Eve in 1989 but some wounds have healed and enthusiasm is trumping scepticism. Foreign investors increased their exposure to Japan stocks by 2.1 trillion yen ($15.4 billion) in April.

While other central banks around the world have aggressively raised interest rates to curb runaway inflation over the past year, interest rates in Japan are still negative. The Bank of Japan has also purchased vast quantities of bonds to keep ten-year government bond yields below 0.5% and the Japanese yen is 35% lower versus the US dollar than at the start of 2021. A cheaper currency and stock valuations have made Japanese stocks much more appealing to overseas investors and, unlike many of its larger G7 peers, the Japanese economy is also at little risk of falling into recession.

One of the most high-profile enthusiasts for the country is Warren Buffett. Buffett’s Berkshire Hathaway has boosted its takes in each of Japan’s five largest trading houses to 7.4%. The trading houses benefit from increased investor activity and also give Berkshire Hathaway exposure to a diverse range of other sectors, including logistics, aerospace, electric vehicles and renewable energy.

Closer to home, Europe’s largest budget airlines released more encouraging earnings reports. EasyJet revealed on Thursday that it expected to operate at close to pre-pandemic capacity in the summer and strong passenger growth boosted revenues by 80% in the six months ending 31 March.

Although easyJet posted a pre-tax loss of £415 million for the period, 25% lower than the same period a year earlier, chief executive Johan Lundgren expects financial performance to continue to improve owing to the very strong demand for flights and travel. EasyJet will add more seats through the newer, larger Airbus A230neo family to replace some of its ageing fleet.

On Monday, its larger rival Ryanair announced it had returned to profit in the year to the end of March. The Irish low-cost airline carried 169 million passengers, compared to 97 million a year earlier, and its load factor increased from 82% to 93%. Costs, excluding fuel, fell to 31 euros per passenger but fares are higher than pre-Covid levels.

Ryanair’s more optimistic outlook was underlined by its order to buy 150 Boeing 737 MAX 10 planes, with an option for 150 more, earlier this month. At list price, the total order is worth more than $40 billion. Some will be used to increase the size of its fleet and others to replace its older 737-800s.

On the flip side, some of the largest UK telecommunications provided more pessimistic updates. BT Group’s shares fell 5% on Thursday after it guided that free cash flow would fall to around £1 billion this year, and debt would be higher owing to increased fibre-optic costs and repayment of government grants. The telecoms giant also announced it would cut its workforce by up to 55,000 by the end of the decade, with up to a fifth replaced by AI technologies.

Vodafone also announced it would cut 11,000 jobs, around 12% of its global workforce, over the next three years. Vodafone’s newly promoted chief executive, Margherita Della Valle, said the cuts would reduce costs by around 250 million euros a year and is under pressure to turn around the fortunes of the business. Its share price has fallen more than 40% in 15 months despite attracting large investment from state-backed UAE telecoms group e& (14.6% stake) and activist investors. Vodafone shares fell 8% on Tuesday after the cuts were announced.

Brent crude prices edged higher to $76 a barrel, supported by tighter supply. Crude exports from the OPEC+ cartel have fallen by 1.7 million barrels a day during May and Russian crude exports are expected to contract later this month.