Nikkei bear market rally possible with foreign investors still wary- JPM

A bear market rally in Japanese stocks might be possible, as foreign investors continue to stay on the sidelines, JPMorgan analysts noted in a recent report. However, this trend also raises doubts about the sustainability of the current market rebound.

Japan’s Nikkei 225 and TOPIX indexes both entered bear market territory last week, having dropped over 20% from recent record highs. While the indexes rebounded sharply from these losses, JPMorgan suggested that the recovery was mainly driven by “contrarian domestic individual investors and domestic institutional investors.”

The brokerage also attributed much of the rebound to dip buying and noted that it had not observed a significant return of foreign investors to Japanese markets.

“It is premature to conclude that we have entered a sustained relief rally,” JPMorgan analysts wrote.

“We cannot rule out the possibility that the current rebound is merely a bear market rally. The extent to which domestic investors can sustain the market until foreign investors fully return is crucial, testing their ‘ability to hold.'”

Foreign investors had aggressively sold Japanese equities last week, and JPMorgan pointed out that there was no indication of their return during the recent rebound.

The limited foreign buying that did occur was more defensive, focusing on banks expected to benefit from higher interest rates.

Sentiment towards Japanese markets was heavily impacted by hawkish signals from the Bank of Japan during an end-July meeting, where the central bank raised interest rates and indicated more hikes could come this year.

Stronger-than-expected gross domestic product data released on Thursday, while providing a positive outlook for Japan’s economy, also gives the BOJ more room to raise interest rates further.