In a way, Sakurajima, or Cherry Blossom Island, is now a misnomer. The 1,117m-tall active volcano was indeed an island, until lava flow from a 1914 eruption connected it to Kyushu, one of Japan’s four main islands, and turned it into a peninsula instead. It serves as a stark reminder how precarious nature is in spite of mankind’s desire to control it.
Our planned hike to crater lake Fudo-Ike, on the Kirishima plain of volcanoes, was disrupted the day before by a gas eruption from nearby Mount Iō, and we were literally shut out. Fortunately for visitors, there are shelters and bunkers for us to run into should things get a little too hot and heavy — a luxury not available to punters of penny stocks or alternative crypto coins, where there is no warning and nowhere to hide when the speculative party ends and things blow up.
A couple of days earlier, I was in Nagasaki, a historic trading port used by the Portuguese and Dutch back in the 16th century, full of cultural richness including hidden Christian sites now included in the Unesco World Heritage list, made even more poignant on my Good Friday visit.
My visit to Nagasaki happened just as the multiple Oscar-winning Oppenheimer was finally released in Japan amid much controversy and mixed feelings. As historians have argued, the second bomb on Nagasaki, just three days after the first on Hiroshima, was an unnecessary demonstration of might by then-US President Harry Truman.
Close to where we stayed was the bomb-damaged Torii arch at Sannō Shrine, a mere 800m from the epicentre. The explosion on Aug 9, 1945, reduced the surrounding neighbourhood to ashes, but this arch somehow survived with one pillar left, and remains standing today, almost 100 years from when it was built in October 1924. Most visitors to Nagasaki pay a customary visit to the atomic museum and rightly reflect on the horrors humans can wreck on each other on top of what nature is already, but I gave that a miss.
Instead, we revelled in the vibrant rebuilt neighbourhoods, a mix of old and new, blending art and culture east and west. We tasted the Minami Yamate Pudding with colour fruit toppings reflecting stained glass designs of its original European churches which were also destroyed or damaged in 1945, and from Mount Inasa admired Japan‘s most beautiful night skyscape full of colour in the cruise centre and harbour. Just like the recovery of bombed-out stocks from a short-sellers’ attack, Nagasaki has come back albeit through a painful period of loss and restoration. The city of 400,000 today reflects resilience, new life and a hopeful future, in the midst of an uncertain world that is moving back towards the past of “might is right”.
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This party’s just beginning
At the end of the first quarter of 2024, we went to Japan in search of sakura, or cherry blossoms. We were greeted everywhere with buds to full blooms with hundreds of trees concentrated in some parts of Kyushu, warm enough for peak hanami, or flower viewing. This year, with climate change and all, the season started late as it was still snowing in Nagano and freezing in Tokyo. That, however, did not stop numerous friends from posting on Facebook pictures from all parts of Japan, or hearing the Singaporean accent regularly at the requisite tourist spots, alongside Cantonese, Taiwanese and mainland Mandarin.
The Japanese tourism revival continues as strong as the Nikkei 225 insofar as its currency hit an all-time low against the US dollar and the Singdollar, nicely timed for our holiday as the first rate hike in decades by the Bank of Japan was twinned with managing forward market expectations down. Conversely, back in the US, Jerome Powell was still claiming that even with latest inflation data being more benign, the Federal Reserve was not in a hurry to cut interest rates. The American markets did not believe him and continued to have a spring in their steps, with the Nasdaq up 10.9% in 1Q, and the S&P not far behind with an auspicious 10.8%. While it hit a new record, this was nothing like the Nikkei 225’s 21.2% rise after piercing through its 1989 bubble high. This quarter’s gains for Japan were almost half of its one-year 43% return.
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I was pleased that Japan’s equity markets, our column’s dark horse for 2023, revalidated by two trips last May and November, continue to run. A little less so was the Singapore-listed Lion-Nomura Japan Active ETF (Powered by AI), which has touted the use of AI to generate alpha but lagged the beta return on the Nikkei due to the peculiarities of the index.
Therefore, the largest constituent of Nikkei 225 is not Toyota Motor Corp, but Fast Retailing, better known for its fast-fashion brand Uniqlo, even though Toyota’s market cap of almost JPY60 trillion ($535 billion) is four times Fast Retailing’s JPY15 trillion. As such, Fast Retailing, trading at just below JPY47,000 per share, commands a chart-topping weightage of 11.03% (near the 12% cap on each component stock), versus Toyota’s mere 1.54%, no thanks to its share price of just around JPY3,600.
In early February, founder and CEO Tadashi Yanai trimmed his personal stake by more than 1.8 million shares to 57.9 million shares, or 18.2%. Some observers say he is providing more liquidity to the market, but with the shares trading at nearly 50 times P/E, why not take the US$470 million ($633.8 million) home, if investors are still chasing up the index!
That said, the Topix — a broader market capitalisation-based index — also delivered a 16% return to investors in 1Q. The big-cap rally is starting to look a little dear even if the economy, wages, consumer confidence and corporate profits are continuing to improve. A little bit of inflation in Japan after decades of deflation has been much needed to fuel global investors who piled in last year, alongside local sovereign fund investment. Together with tax and pension fund initiatives, it is steadily attracting new capital to the markets from traditional Japanese savers.
This looks set to continue, even if by end-March, the big-cap rally appeared to be trickling out to others offering growth and value but thus far neglected; in which case, it may be time for alpha to outperform beta in 2Q as the sakura season runs out in April. Being positive thus far on validating this dark horse, I might look to allocate more to the Japan AI ETF and wait for alpha to catch up.
Western rotation
Broad similarities are occurring across the Pacific, beyond Pearl Harbor. As US markets make new highs at the end of 1Q, market leadership has changed. True, Nvidia Corp has managed to regain US$900 after an overdue correction closer to US$1,000. However, the Magnificent Seven stocks that had led the 2023 revival had to catch their breath. In their wake, through March and the earnings season, these Samurais may have inspired a lot of value stocks lost in the growth-hungry, AI-fuelled investment story. Like wandering ronin in an Akira Kurosawa movie, boring names in boring sectors are starting to awaken from their slumber.
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This is healthy. My pessimism on US indices for the last half-year was due to the fact that the leadership was narrow and driven by institutions, private banking clients, and retail investors worldwide piling in. To the extent that the breadth of the market has improved and the index continues to accrete, it gives me confidence that the long-overdue correction that market Cassandras have called for will still be in the distance.
It lends credence to my original assumption that in this US election year, more highly charged than usual given the Biden-Trump rematch, equities will be benign and positive. Some have in fact even argued that the Fed’s stay on interest rates in 1Q, while signalling that it has three cuts still coming this year, is to save its bullets for any wobbles in the market closer to November’s election. Conspiracy theories aside, selling the leaders and rotating into the other 493 constituents of the S&P is again a search for alpha. Will 2Q see a flattish overall index performance, but from the ashes of long-forgotten consumer, industrial and energy cyclicals? And will new life hold up the US indices?
The perennial laggard stirs
Back home, our much-maligned Straits Times Index (STI) managed to finish 1Q flat — again. It almost notched 1% up, falling instead to a last half-day on profit-taking on the three local bank stocks that make up almost half the index. It was a quarter saved by the last two weeks in March after another round of record profits (in spite of analysts generally being bearish on the local banking sector for 2024), and Singapore Telecommunications Z74 (Singtel), which recovered from its $2.30 lows back above $2.50 as investors finally paid attention to the sum of its overseas parts after rumours of the Optus sale surfaced.
To be fair, it would have been a nicer positive 1Q number if not for the last week of December 2023, which saw the index rally over 3% to end last year flat! What is encouraging nonetheless is that the overall volume in recent months has expanded from second-half lows on the Singapore Exchange S68 . And there is also some chatter about trickle-out from some portfolios from the markets in the US. If indeed the mood globally has shifted from growth to value, and there is a search for global alpha, this is the market that is full of it, and we may yet have a macro tailwind giving our market a lift into summer.
Locally, the STI’s late quarter rebound back above 3,200 points was fuelled by banks and Singtel. While there may be more room for the latter to run per analyst targets being generally above $3, there are a host of value stocks in the same regional consumer and industrial cyclicals in the high-single to low double-digit PEs outside of the Big Four stocks. Alpha-seekers will have ample opportunity to seek out new life from the ashes of bombed-out index and mid-cap stocks, as should we finally break out of the 3,300 STI level, it may be like in Japan or the US, and the laggards will start to blossom.
Chew Sutat retired from Singapore Exchange 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
