Tags: global economy | investor | valuations | stock

Japanese Market Driven by 'Irrational Exuberance'

Japanese Market Driven by 'Irrational Exuberance'
(Dollar Photo Club)

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Wednesday, 09 September 2015 08:49 AM Current | Bio | Archive

“Hope” seems to be the main, if not the only, driver for this kind of irrational exuberance in the Japanese stock market.

Only one day after the Cabinet Office of the Government of Japan informed the annual growth rate during the second quarter of Japanese GDP contracted by 1.2 percent (which was better than the first contraction estimate of -1.6 percent), capital expenditures contracted by -0.9 percent (which was far worse than the first contraction estimate of -0.1 percent) and exports of goods and services contracted by -4.4 percent (which was unchanged from the first estimate),  Japanese stock markets jumped an euphoric 7.7 percent, which was its biggest one-day rise since 2008.

This apparently irrational behavior, at least in the context of what the long-term investor has to take into account when making investment decisions, makes me wonder if I really had missed something like, “Had the Japanese economy suddenly woken up and started growing again, or had “Abenomics” finally started giving Signs it was really working?”

At the end of the day it all came down to a sudden flair of hope that was ignited by Prime Minister Shinzo Abe who said his government will aim at lowering the corporate tax rate by a “cumulative” 3.3 percent, to be spread over the 2 fiscal years beginning in April 2016, adding they would seek even greater cuts if possible.

I’d like to add here that more than 70 percent of Japanese companies don’t pay income taxes and earlier this year corporate taxes were cut by 3.29 percent, also spread over 2 years.

In China, the Shanghai was also up again on hopes more monetary stimuli are coming alongside state owned companies that continue buying stocks, which is one of the Chinese ways of market interventions.

The Shanghai composite index ended the day up by 2.29 percent and the Shenzhen composite index ended the day up by 3.29 percent.

If that kind of game, especially in the Far East, which is mostly played by professional players and from which common investors should better stay away, continues until after next week’s FOMC meeting, these (temporarily) better and/or higher stock market numbers could allow the Fed to perform its first move to normalization, which of course not a sure thing.

If the Fed does its first move there is no doubt whatsoever it will move against the “desires” of institutions like the IMF  and now also the World Bank.

Interestingly, World Bank Chief Economist Kaushik Basu said in an interview with the Financial Times on Tuesday the Fed starting to raise rates at next Thursday’s meeting would be a mistake and could trigger “panic and turmoil” in emerging markets.

He stated: “I don’t think the Fed liftoff itself is going to create a major crisis but it will cause some immediate turbulence.”

What’s for sure is once the Fed’s hiking cycle starts, and it doesn’t matter if that is now or a few months later, investors will enter a “new era” that will cause changes, some more important and others less, but not abruptly and over time, in the values of equities, commodities and housing.

Deutsche Bank compiled data of 15 globally important developed markets, which were Australia, Canada, Denmark, Finland, France, Germany, Italy, Japan, Korea, the Netherlands, Spain, Sweden, Switzerland, the UK and the U.S. The same could not be done for emerging markets because of lack of dependable data.

Yes, the biggest challenge will become what will happen after the Fed has started raising rates.

It’s an undeniable fact that present price levels of equities, commodities and housing in the 15 developed markets that are mentioned here before are higher than they were in 2008 and 2000.

Bonds and equities are at their highest ever combined valuations when aggregated across these 15 countries while 83 percent of observations are in their top 20 percent of valuations through history.

Does all this mean we are at the top of the valuations? NO!

Nevertheless we also must admit there is more room to the downside than to the upside.

Long-term investors could do well revising realistically their portfolios in function of what could happen over the next 2-3 years.

In context of where we could go from here, it’s always helpful/enlightening to look at how we've performed over the last, let's say 25 years.

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HansParisis
Bonds and equities are at their highest ever combined valuations when aggregated across these 15 countries while 83 percent of observations are in their top 20 percent of valuations through history.
global economy, investor, valuations, stock
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2015-49-09
Wednesday, 09 September 2015 08:49 AM
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