​Trump pits Japan's stock market against China's

Asian fund managers remained largely bullish on Japanese stocks, the latest BofA survey showed, despite increased uncertainty over the country's political and monetary policy outlook.

Sentiment towards China turned more balanced, as investors maintained calls for a stronger economy, but trimmed their enthusiasm over more stimulus from Beijing despite Trump victory.

The survey showed Japan with the highest concentration of overweight positions, at about 45% of respondents. The market moved sideways after a late-October rally fizzled out.

Meanwhile, market watchers see the possibility of funds flowing into Japan given Trump's anti-China stance. Morgan Stanley just reiterated its preference for Japanese shares over Chinese ones.

The Nikkei index was up about 16% so far this year, on track for its second straight annual gains. Berkshire has raised $1.9 billion in yen bonds, signalling its intention to add its Japanese exposures.

But some other market participants are more optimistic about China's prospects. Societe Generale SA strategist Frank Benzimra said Japan faced slowdown in earnings growth after a strong post-pandemic boom.

While he sees a short-term hit to Chinese assets, he maintained an overweight position on expectations that the "policy course correction undertaken" will continue as the main equity driver.

Cautiously positive

Japan's engine of growth is already switching from exports to consumer spending. With deglobulisation looming again, a stronger yen is much needed to balance the economy.

Even if Japanese companies can navigate their way through higher tariffs and intensified "pick-a-side" rhetoric from China hawks, the business in China could be far less rewarding than in the past.

A Reuters poll conducted in October showed a very slim majority of economists projecting the BOJ to forgo raising rates again this year, although nearly 90% still expect rates to rise by end-March.

Nicholas Smith, a strategist at CLSA, sees the prospect of a six-month boost for Japan as animal spirits lift the financial sector. He said global capital spending should now thaw quickly, favouring Japan.

Aggregate earnings for the quarter ending June came in ahead of expectations with double-digit year-over-year growth. The index is trading at a multiple of 20.6x – around the 10-year average.

Concerns are that Shigeru Ishiba and his party are seen as too weak to disturb the economy's momentum, or unravel the progress on corporate governance reform and restructuring to draw foreign investors.

A growing number of global funds appear to have been convinced that Japan is finally at a turning point, but without the sort of comfort levels needed for a really big reallocation to the country.

Tepid earnings

Chinese earnings returned to growth in Q3 but a closer look at the numbers reveals a picture that's far less encouraging. Beyond the financial sector, profits declined at a steeper pace.

According to UBS Securities, insurance and brokers reported 233% profit growth in the three months from a year earlier due to their investment returns, while non-financial earnings dropped 9%.

While the stimulus drive may filter through to corporate performance in the months to come, analysts say the boost may be limited unless policies address weak domestic demand.

Local consumer giants continued to struggle. Kweichow Moutai missed estimates, while appliance maker Midea Group met the consensus with the benefit of hefty forex related gains.

Still some positive signs are emerging. Alibaba Group said it recorded "robust growth" in sales and a "record number" of shoppers over this year's Singles' Day sales period.

China also announced on Tuesday that two days will be added to the public holiday calendar next year in the effort to lift spending. Unfortunately, Washington remains a major headwind.

Some US pension money may have returned to Hong Kong and Mainland China in recent months, but that could quickly reverse under Trump. And the flows may well divert to Japan by default.

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