An outdoor onsen soak in Japan is an experience unlike any other. As one sits in the almost boiling mineral-enriched waters, the gentle gush of a river is within earshot. By keeping one’s head above the water amid the cool autumn air, haiku lines often ensue.
Such was the indulgence I had in Kurokawa, among the high Aso-Kudu plains next to a live volcano where hot steam hisses out without fuss generally — save for October 2021, when volcanic smoke shot up 3,500m into the sky and disrupted air traffic.
The crisp single-digit autumn air, dotted with beautiful Japanese red maple, descended into 28-degree sunstroke weather by the time we reached Beppu, which is famed for its seven “hot pond hells” of bubbling iron sulfide and oxide and steaming geysers that’s right next to our hotel room.
Such is the changing nature of global warming, where new weather patterns send the “wrong” signals to trees and where there appears to be a backlash in the UK and the US against ESG funds.
According to recent data by the Financial Times, UK pension investors have pulled out of post-Covid-19 underperforming responsible funds at a record rate as traditional big oil companies continue to reap the benefits of a buoyant crude oil market.
Reading and predicting the weather nowadays or expecting the road to ESG heaven to be smooth sailing because it is paved with good intentions is as difficult as predicting market moves.
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Considering that there is so much uncertainty and noise from the macro Fed-driven twists and turns all year to what former US Secretary of Defence Donald Rumsfeld called “known unknowns” — perhaps like how the Hamas lit tinderbox last month.
That said, this column’s calls in 2023 have had their moments — notably, calling Japanese the dark horse market of the year in January. And this call appears to hold its ground, with the Nikkei still up an auspicious 23.88% as I headed to Kyushu.
Land of the Rising Sun
Those who follow this column may remember the ones on May 25 and 31 following my visit to Tokyo, where the Nikkei was up almost 25% year to date by then. The Nikkei subsequently topped off at a July high of almost 31% before trading in a 10% range between 30,000 and 33,000 points — and a nice lift-off from the January start of 25,800 points.
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In May, my prognosis was that with the overlooked market having run up by 20% and global investment banks and local private banks then rushing to upgrade, Japan looks to be the beneficiary of portfolio flows and would remain well supported for the foreseeable future, even though the sharpest part of the 2023’s bull was done.
For those who heeded the call in January, some profit-taking was suggested insofar as there was a risk of a weaker yen reducing returns in Singdollar terms — even if nominal equity prices will continue to benefit from an economy experiencing some wage push inflation-led growth for the first time in decades.
That call was an informed hypothesis, but it was also lucky. It coincided with the Fed signalling that rate hikes were not over in July, bursting the summer low liquidity bounce for equity markets worldwide. I was delighted when my May holiday to Tokyo coincided with when the Singdollar hit JPY100 — a 25-year-high.
I did not expect our Singdollar to strengthen further in five months to reach JPY108, which made my current trip to Kyushu even more affordable — even if some price adjustments were evident, no thanks to costlier imported energy.
Yet, Japanese corporate profits from traditional exporters like Toyota to Fast Retailing, with foreign currency revenues repatriated to yen nominally, continue to boost the earnings and dividends for stocks in the Nikkei 225 index.
The Nikkei index has since treaded water and will likely stay in its range without a new nominal high by the year’s end. It is also not likely to reverse course as “The Samurai Spirit” — as described in Chew On This on May 31 — of domestic sovereign wealth fund support, which enabled the local capital market ecosystem to find its feet and emboldened foreign investors to return — is being supported by long overdue positive inflation and tentative but increasing consumer spending. The weak yen has attracted capital inflows, physical property purchases and a return of tourists like myself.
In Fukuoka, the hotel where I stayed, confirmed that occupancy level is now higher than before the pandemic. South Koreans, Hong Kongers, Taiwanese and Singaporean footprints were all over the tourist sights of Kyushu. In contrast to China, where domestic tourism is on the run, Japan’s consumer rebound is supported by overseas visitors, with domestic travel pockets more limited to mid and lower-end spending.
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Satoshi come back
On this trip, I have also seen a country picking pace in its digital transition. One of the beneficiaries of the pandemic has been the adoption of technology in many companies and countries. Japan’s archaic cash-mainly payment practices — nice and respectful of its elderly — remain in some smaller towns and older businesses.
However, there is a perceptible change as QR codes, online bookings, and payments become more popular. A more vibrant youth culture and middle-class spending have adapted to more efficient and perhaps more pervasive consumption patterns versus its traditional savings culture.
This was most evident in two separate malls in Beppu. Tokiwa, a storied department store landmark along Beppu’s Orchard Road equivalent, had all the hallmarks of old, genteel Japan. Despite its location near the train station, it was closed by 7pm, and many units of the top floors looked permanently shut, as were some of the traditional handicraft shops decked out in Meiji-era architecture. In contrast, the modern YouMi mall, just 10 minutes walk away, featured attractively-priced mid-market brands such as Uniqlo and its offshoot Gu and foreign ones. It was lively throughout and kept going till 10pm.
Confounded especially with a structural shortage in healthcare and hospitality labour, there is already a growing number of foreigners living and working in Japan — including long-term “visitors” from China. The traditional, proudly homogenous society is no longer. One cannot help feeling a tad worried about the erosion of traditional culture as the nation opens up in the post-pandemic era — much like how Commodore Matthew Perry’s gunboats forced upon international trade in 1854.
With Japan consistently counter-trending with the Western economic and market cycles, the fact that the Bank Of Japan has signalled that it will tolerate a positive yield curve has seen the yen strengthen a tad from all-time lows against the US dollar last month. If this continues, it will rise in an era where the Fed, European Central Bank (ECB) and Bank of England (BoE) are likely holding and easing into 2024.
My conclusion following this November trip is that my 2023 call in May is validated. Investors long on Japan as the dark horse in January are still well in the double digits. If they sold, they can now buy back more cheaply with a slightly lower equity index off its high and a cheaper yen. This is a nice setup for next year, where a mild overdue positive inflationary environment, better corporate profits, and consumer spending from wage increments and tourism should keep equity markets buoyant — coupled with sovereign wealth support and rising domestic confidence in the capital markets on the back of higher tax-free equity investments of one’s pension to kick off in 2024.
One might also get a currency boost next year. Relative to other major western markets, this year’s dark horse, which has stalled since May as we anticipated, may restart its canter into the new year.
Leaving October behind
October was sobering for most equity markets, not least because of rising risk premiums from the evolving tragedy in the Middle East. That said, despite pretty horrendous macro and geopolitical uncertainties, the major fall many were bracing for did not happen, even if yet another mild correction took place from the risk off.
The slew of new listings failed to lift animal spirits, with major recent IPOs in the US, such as Arm, now underwater. The bottom did not fall off completely in equities. Despite their best efforts, Republicans eventually elected another speaker to the House, and we are set for more tiresome arguments about extending the budget, which is due to run out in mid-November. At least the Senate had started confirming military appointments in early November.
The Straits Times Index (STI) did dip below its narrow 3,100–3,300 trading range for a week or so, but the banks stayed resilient and did their job as an automatic stabiliser to the index whilst the other consumer and industrial constituents fell back, some to very attractive levels. Still, it is clear that the world dances to something concrete: Jerome Powell’s Fed. Indications that the data-driven Fed was more sanguine and didn’t scare the market before Halloween helped the STI hold at around 3,050 levels.
A slowdown in US employment data just after we had our Halloween pumpkins — appears to validate markets’ hopes for an extension of the Fed pause in December. For now, bears and Cassandras fret about 10-year Treasuries and the long end of the curve rising.
After the US markets staged an early rebound in November, the STI had a 2% pop on Nov 2, bringing it back into its range for the year. Perhaps investors cheered how the scary month of October has been left behind with its various Black Fridays. Perhaps they hope November will help close a few more IPOs and M&A transactions, and they will be in good spirits for Thanksgiving.
Winter is coming, but the worst for 2023 seems to have been left behind for equity investors. I remember the onsen lessons revisited in Japan as markets continued to blow hot and cold. Keep the fire on to seize opportunities when they come, but keep one’s head cool — so that you can assess if that hot stock is rising on hot air. Enjoy the bubble when it comes, but avoid being in hot soup afterwards.
Chew Sutat retired from Singapore Exchange S68 after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore
