Citi flags risk of near-term correction in Japanese equities

Invesitng.com - Analysts from Citi on Wednesday flagged the risk of an imminent correction in Japanese equities, observing that Japan's equity market has been fluctuating since mid-March, with its performance gap with the US market widening.

Citi's analysts believe that it will take some time before the positive drivers of Japanese equities, which they foresee, actually materialize.

They suggest a near-term investment strategy focusing on stocks with low beta and low volatility, high dividend yields, and those that are uncrowded trades. This approach, according to Citi, could prove promising in the current market scenario.

The report highlights that Japanese equities have been underperforming compared to their US counterparts. Factors contributing to this include uncertainty over the Bank of Japan's monetary policy, conservative company plans, and consistently weak domestic demand.

Additionally, while US stocks have been propelled by impressive rallies in the so-called "Magnificent Seven" stocks, momentum in Japan's tech stocks has been waning.

Despite these challenges, there are potential positives on the horizon for Japan equities. These include the stabilization of forex rates, Q1 guidance beats, and domestic demand recovery expectations fueled by a shift in real wages. However, these developments are unlikely to materialize until late July or early August at the earliest, according to Citi.

Given the current circumstances, Citi warns of the risk of a near-term rebound in lower-than-expected US long-term interest rates, which could trigger a correction in Japan stocks, emphasizing that if US long-term interest rates decline due to further weakening of economic indicators, a risk-off trend is likely, triggering a decline in both interest rates and stock prices.