On my favourite market: not too much. Most of the Abenomics bang was in the start, and his reforms have been quite slow to materialize. Japan has shot two arrows of the three promoted, and Kuroda Haruhiko has been pretty adamant about complaining to the currency market judging his shooting to be a misfire by talking quite a lot about the continued need for easing. The only real effect came after the US started showing signs of reigning in the QE experiment just as Europe and Japan are getting into it full-swing.
Meanwhile Japanese companies are stockpiling cash, the yen blew past 100 and has been trading between there and 110 for more than a year, and very recently a volcano is really calling into question the validity of using nuclear power. (I’m wondering if there will be any problems related to the typhoon that looks set to flood the whole country during the weekend, but I’ll update about that as things become clearer in the future.) Still, the eroded trade surplus pushing the yen further south is speaking its clear language. The Nikkei 225 has been wobbling between 14 000 and 16 400 in correlation with the yen. Additionally, the financial news media is shocked that the tax hike impact on the economy was as predicted! Oh dear… The fact that QoQ numbers are extra severe given a base effect push due to demand acceleration in the prior months has passed the financial news media by completely. It is simply not interesting to report positive news on Asian finances I guess.
What do I think is fair value for the yen and by extension the Nikkei? This depends to a large extent on two things: the import cost of Japan’s continued energy needs, and the relative inflation (thus implying that velocity of money and the monetary base play a major role) vs. major alternatives. I will try to go into more quantitative detail on this some other time since it is a question of rather major importance to get right, but if there is a natural gas price spike this winter again (which brought a lot of import price increases to Japan) I would really consider the USD/JPY to get close to 120 as probable, but that would roughly imply a strict hold on the Nikkei. I’ll run a bit of GARCH and time series regression simulation on these things later tonight, hopefully it will yield slightly better quantitative results.
Hong Kong and China:
There have been a lot of different moves, primarily in the continued bobbing and weaving of Chinese monetary policy. Will they / won’t they tighten / ease? Markets have been pretty responsive to these moves, and the Hang Seng Index briefly jumped above the 25 000 level (more technical analysis probably to show for it later) but is now struggling around the 23 000 level following protests in the Special Administrative Region. Yay for 9% drops…
In other developments, Alibaba IPO’ed to immediately eclipse Facebook in market value (thank god!) and the Hong Kong and Shanghai markets look set to link on October 26th, which has given some good buoyancy to the Shanghai market, although putting this in perspective a relatively similar move (20%-ish rally) was set in motion thanks to the CCP leadership change, with paramount powers being given to Xi Jinping. People talk excitedly about rallies in China, but the fact is that on many metrics related to stock valuation instead of performance, China is still hopelessly behind and there is a big discount for many shares not enjoying the HK-SH link. Xi’s massive anti-corruption drive has also succeeded in effectively squashing the Macau casino market valuation and revenue growth, meaning that I think Macau casinos are very close to total bottom pricing at the moment.
Overall, the “rally” isn’t really that impressive, and there will be more needed in terms of monetary easing and actual reform going forwards to move the Shanghai Composite towards something like, say 3000 which would be considerably more significant bullish territory 25% north of here. Consumer stocks and IT still looks rather attractive, but I would like to see more to push further bullish positions in property or finance sectors in China.
I do think that Hang Seng Index fair value is somewhere north of 25 000, but that there will be a lot of political uncertainty in the weeks to come and that any gains are likely to be piggybacking on the HK-SH link, and that anything substantial above 25 000 could probably not materialize before 2015.
Rest of the world:
I have arguably not been too interested in the rest of the world, but… well… here’s to European QE and US markets trading like all news are good news! Also, be ready to short the Swedish housing market in a few years when Europe needs to withdraw QE and the interest rates in the country start going up when housing regulations (some of the laxest in the world) have been relaxed even further to put people in houses!