Japanese stocks have been the star performers in 2023, outpacing their Chinese counterparts. However, a growing number of investors are now anticipating a reversal of fortune. Headwinds are emerging for Japanese equities, including concerns about deteriorating global growth and the potential end of the era of yen depreciation, which has boosted exporter earnings. Conversely, optimism is building around Beijing’s efforts to support the Chinese economy and local equity markets, which could help lift Chinese stocks from their position as some of the year’s worst performers. Additionally, historically low valuations are luring investors seeking opportunities in the Chinese market.
Jun Bei Liu, a fund manager at Tribeca Investment Partners Pty in Sydney, believes that relative outperformance in the next year will come from China or economies closely tied to China. She points out that Japan, having seen substantial outperformance this year, presents an accessible opportunity for investors to shift their focus.
In 2023, Japan’s Topix index has surged by 23%, on track for its strongest year in a decade. Factors contributing to this growth include accelerating economic expansion and efforts to enhance corporate governance, attracting investor interest. In contrast, China’s benchmark CSI 300 has declined by 7.4% due to concerns about the nation’s economic recovery from COVID-19 restrictions and a struggling property market.
However, there are indications that Japan’s outperformance may have reached its peak. The Topix has retraced over 4% from its annual high as global interest rate hikes raise concerns about external demand, which could negatively impact Japan’s export-oriented industries. Furthermore, Japanese stocks have a high correlation with the S&P 500, and the recent correction in the S&P 500 has affected the Topix. Japanese equities are also vulnerable to a potential strengthening of the yen, which has depreciated by nearly 13% this year and is nearing a three-decade low.
Chinese equities offer an attractive earnings outlook, with companies in the CSI 300 Index expected to achieve an average 22% earnings growth over the next year, compared to just 5% for constituents in Japan’s Topix. Valuation metrics suggest room for a rebound in Chinese equities, as the CSI 300 Index trades at 10.5 times forward earnings, below its five-year average, while the Topix trades at 14.3 times, in line with its historical average.
In a correction scenario, Chinese shares may hold up better than other Asian markets due to light positioning and appealing valuations. Meanwhile, Japan is likely to follow the path of the United States. Experienced investors recommend careful stock selection in the Chinese market, emphasizing the need for selectivity in an environment that demands cautious investment decisions.
