Japan stocks face volatility amid “Trump trade,” rate uncertainty- BoFA

Investing.com-- Japanese stocks could face a summer of volatility, BoFA analysts wrote in a note, stemming from a paradigm shift driven by speculation over a Donald Trump presidency and lower U.S. interest rates. 

Uncertainty over the Bank of Japan’s plans to raise interest rates is also another source of volatility for Japanese markets, especially if the yen appreciates on an early rate hike by the BOJ. 

A global shift into more economically-sensitive sectors- amid expectations of lower U.S. interest rates- spilled over into Japanese markets in recent sessions, with traders piling into mid-to-small capital stocks over major large caps. 

Growing expectations of a second Trump presidency also drove the so-called “Trump trade,” which compounded this shift out of technology and into growth-sensitive sectors, BoFA said. 

"The perception that Trump’s policies would stimulate the economy has further amplified this reversal in stock selection," BoFA analysts said.

Major large-cap stocks- specifically technology- were the key drivers of Japan’s stock market over the past year, with the Nikkei 225 racing to a record high above 42,000 points just last week. The TOPIX also hit new peaks in July.

While both indexes fell sharply from these highs in recent sessions, they were still trading up about 20% so far in 2024.

BoFA expressed caution over committing to a bigger shift out of technology. But the brokerage said it was “sensible” to pick some stocks sensitive to domestic demand. For Japan, the BoFA said it was better to pick mid-caps over small-caps, and that large-cap stocks were likely to remain favored by investors. 

The brokerage downplayed the notion that a Trump presidency could result in higher interest rates, stating that such an occurrence in his first term was driven by a different economic setting at the time. 

Still, analysts noted that the outcome of the U.S. presidential election was “up in the air.” 

BoFA said that Japanese markets, after a potentially volatile July-September, were more likely to rise in October-December, “when visibility will be clearer on the BoJ, the Fed, and the US presidential election.” 

The expect the BOJ to hike rates by 10 basis points in its end-July meeting.