During the early Asian trading hours on February 04, 2014, the Nikkei 225 is trending downwards by close to 10.0 percent year-to-date, and was hovering around the 14,200.00 mark. Much of the causes have been the ongoing emerging markets exodus, coupled with declines in both the Chinese and the United States key manufacturing gauges which has led to an overnight plunge by some 326.0 points on the Dow Jones Industrial Index (DJIA), and a massive correction in valuations of many public-listed companies around the globe. The S&P 500 trades at close to 1,741.00, and the next 200-day support is around 1,705.00, which many technical analysts are predicting that the index will reach those support levels in a couple of days. The US equity markets are trading somewhere close to 14.0 to 17.0 times earnings, which, according to many analysts, seemed to be fairly valued, despite many of the sour 2014 outlooks being expressed by many company chief executive officers (CEOs). The uncertainties in China and the United States have resulted in massive spillovers to the Asian markets.
A chart illustrating the year-to-date of the Nikkei 225 index might shed some light on some of the expectations of the direction of the Japanese equity markets going forward, as the April 2014 consumption tax kicks in with a 8.0 percent hike from the previous 5.0 percent.
As readers might have noticed, the Nikkei 225 index was last traded at around 16,000 levels when it closed out 2013, but based on the one-year price chart of the index, the latest correction we’ve seen so far is quite massive, and it is now trading at levels below its 200-day moving average, with no indications of a turnaround or an upside in the near term. The Japanese Yen has weakened slightly to 101.00 against the US Dollar, as investors are heading for the exits out of emerging economy currencies, and into safe haven currencies such as the Japanese Yen currency.
At the recent Bank of Japan (BOJ) meetings held on January 22, 2014 Governor Haruhiko Kuroda and his colleagues have agreed to maintain interest levels at close to zero, which was expected by many economists, and its bond buying programme has been kept unchanged at 7.0 trillion yen per month. The BOJ hopes to retain some of the so-called ‘monetary ammunition’ in order to cope with potential fallouts in the economy following the introduction of the consumption tax in April.
The amazing run-up of the Japanese equity markets were the result of Prime Minister Shinzo Abe’s radical economic policy known as ‘Abenomics’ which led to an unprecedented rise in the Japanese equity markets with the ‘Three Arrows’ policy including fiscal, monetary, and structural. However, as we enter into 2014, it appeared that the upward momentum of the major Japanese stock indices has been off on a slow start. According to a January 04, 2014 Bloomberg News article, analysts from Myojo Asset Management have predicted that the Nikkei 225 will tumble to 9,000.0 by year’s end as a result of the April consumption tax hike, and the continuing emerging markets rout.
There have been various discussions, and articles written by myself on some of the reasons leading to the downtrend investors have seen as far as the Japanese equity markets are concerned, namely the slow start of the structural reforms, and the pace of wage growth which have not kept up with the upcoming April 2014 introduction of the consumption tax hike. Prime Minister Abe has not formally made public on his Cabinet’s proposals on how to work out a comprehensive solution to deal with the structural reforms needed.
With the continuing declines in the global market indices, the months of January and early February 2014 proved to be a disappointment for many investors, baby boomers, and fund managers, among others. There has not been such a massive correction since the fall of 2008, and issues relating to emerging markets have continued to linger for the past few weeks, and have shown no visible signs of abatement. Some country central bank chiefs, including the Reserve Bank of India governor, have openly criticised the US Federal Reserve (US Fed) for not taking into account the potential fallout of many emerging market economies as a result of the ongoing monthly monetary stimulus withdrawals. However, despite the criticisms, one has to take a step back and note that there was no congressional mandate that US Fed has to take into consideration of its monetary policy decisions it made and the impacts to the global economy. The US Fed has a dual mandate of maintaining full employment and stable inflationary conditions in the United States, and not the world, therefore to pointedly blame on the US Fed for causing such a massive global sell off might be quite an unfair accusation made, as many of the market volatilities that took place during the second half of 2013 should have been anticipated by policy makers coming from the Emerging Market economies, but somehow, the governments of the so-called ‘Fragile 5’ (coined recently by Morgan Stanley) including Indonesia, India, Brazil, Turkey, and South Africa have not undertook the necessary economic policies that sought to bring down their respective current account deficits. We are now witnessing the consequences of the action delays made by these countries’ policy makers. It is still quite early to tell whether the run-down of the financial markets seen recently will have resulted in significant long-lasting impacts to the firms’ bottom-line going forward, but valuations do need to be corrected in order to maintain some kind of a stable rationale that has in the past, not been accompanied by the fundamentals seen in last year’s run-up of the global financial markets.