Chinese shares are showing surprising strength both here on Friday and this month and, perversely, are acting as a safe haven in this week's wave of selling. A market called "uninvestable" in March by JP Morgan Chase has actually played very solid defense since those analyst comments caused the Chinese market to dip.
The CSI 300 of the largest shares in Shanghai and Shenzhen closed up 1.4% on Friday, at odds with the selloff across most Asian markets. The mainland index has risen 5.3% so far in June. During that period, the S&P 500 has shed 11.3% and the Nasdaq composite has descended 11.9%. The shares of mainland Chinese companies have risen 13.9% since this year's lows on April 26.
What's going on? Essentially, the situation had become so bad for Chinese shares that it pretty much had to get better. Markets that had sold off heavily already in 2021 provide safer ground in the equities earthquake of 2022, with policymakers now promising supportive moves. And the two largest economies in Asia are still benefitting from supportive central banks.
In Hong Kong, the Hang Seng Index closed on a 1.1% gain on Friday. Last year's worst-performing major market has lost only 1.6% in June and has staged an 8.7% rally since its last dip on May 12. Hong Kong stocks are up 14.4% from their 2022 lows in March, although you would have had to be quick to pick that bottom - the "uninvestable" call caused a short-lived, three-day selloff.
Japan's central bank stands pat
The Bank of Japan (BOJ) today left rates unchanged as it concluded its two-day meeting. Japanese stocks did drop 1.7% on Friday in the form of the Topix broad index and have lost 4.0% in June. But an accommodative monetary stance should underpin corporate profits. Both China and Japan have inflation rates around 2%, meaning there's little pressure to deliberately damage the economy in order to get price increases under control.
The Chinese government once again wants the private sector and the stock market to stabilize, then advance, and they're promising stimulus to make that happen. The People's Bank of China also left rates unchanged earlier this week
The Bank of Japan's decision to hold today sent the yen rapidly south. It is trading at ¥134.39 to the U.S. dollar as I write and has not quite retested Monday's lows, when it broke through the ¥135 barrier for the first time since 1998, weakening as far as ¥135.47 to the greenback. I went into greater detail on Monday as to what the yen's quarter-century low point means.
The yen's sudden strength midweek, which saw it rally 2.7% to ¥131.46 on Thursday, was likely due to traders trying to cover their positions just in case the BOJ did make a bearish move. Now that "event risk" has passed, we're back approaching ¥135 again.
We're warned not to fight the Fed. Does that mean we should be siding with allies in the form of Chinese and Japanese central bankers and their accommodative stances?
One thing's for sure, the weak yen is here to stay as long as the BOJ holds its ground.
The weak currency does threaten household budgets, increasing High Street prices, so it comes with costs. Japan imports all its fuel and many goods, which are going to go higher. "Mr. and Mrs. Watanabe" are already feeling the pinch.
Weaker yen's upside...
But some companies do stand to benefit. Rocky Swift at Reuters notes that the biopharma giant Takeda Pharmaceutical ( (TAK) and T:4502), Japan's largest drugmaker, has projected sales and earnings based on a ¥119 exchange rate. Because it gets 80% of its sales overseas, it will have a "high single-digit percentage upside" versus its forecasts, chief financial officer Costa Saroukos said.
The videogame hardware-software specialist Nintendo ( (NTDOY) and T:7974) used a ¥115 rate when it issued its full-year forecasts last month. It gets 77% of its sales from outside Japan, with the Americas accounting for around half total sales. Even Europe brings in more money from the maker of the Switch and Mario Bros than its home nation. Each ¥1 shift from ¥115 results in a US$47 million bump in U.S. sales, Nintendo says, even if the underlying numbers are flat.
With a ¥135 rate, you're talking about a US$940 million boost to Nintendo's top line, almost US$1 billion, with no signs the yen will strengthen from here. Although the Switch has been the best-selling console every year since 2018 following its release in March 2017, Nintendo actually makes most of its money on software sales, the games that are played on the Switch. Online sales of games for download overseas flow right into the bank back in Japan.
Toyota Motor ( (TM) and T:7203) and Panasonic Holdings ( (PCRFY) and T:6752) used the same ¥115 rate as Nintendo. Camera maker Canon ( (CAJ) and T:7751) went with ¥120 when it made its forecasts, and Sony ( (SONY) and T:6758) was one of the outliers in using a ¥123 exchange rate to calculate its forecasts. Canon President Fujio Mitarai said the yen's moves could be "a very big plus" for the company. The main issues are that components are getting more expensive if they're sent back to Japan, and it's also hard to set prices when the currency is moving quickly and in unpredictable patterns.
Investors looking to recoup that benefit must focus on companies that derive the vast majority of their revenues outside Japan. Consumer companies with the bulk of sales inside Japan are suffering. Beer brewers such as Asahi Group Holdings ( (ASBRF) and T:2502) and Kirin Holdings ( (KNBWY) and T:2503), which also sell a whole host of other foods and drinks, have been forced to raise prices for the first time in years. Higher prices for cans and particularly fuel, for production and the expensive business of trucking beer around caused Asahi to raise beer prices for the first time since 2008. Convenience store chain Lawson ( (LWWLY) and T:2651) has also had to hike prices, with its karaage deep-fried chicken nugget snack rising for the first time in 36 years.
By contrast, domestic plays have looked most-promising in China. Friday's gains were driven by companies such as e-commerce platform JD.com (JD and HK:9618), which marched 6.1% higher. The grocery delivery app Meituan ( (MPNGY) and HK:3690) gained 5.2%, the second-best performance in the Hang Seng Tech Index, while there were also strong performances from hotpot restaurant chain Haidilao ( (HDALF) and HK:6862,) up 4.3%, and brewery China Resources Beer ( (CRHKY) and HK: 0291), up 3.4%.
The Beijing leadership doesn't let the Chinese yuan trade freely, so we shouldn't expect such strong moves as we have seen in the yen. But Beijing would like to stimulate both production and consumption. This week's output figures, which as I noted on Wednesday were unusually strong, showed that retail sales are still falling, down 6.7% in May, but that was a big improvement from the 11.1% decline the month before.
It's a far cry from the desperate position that the private sector faced as the Chinese Communist Party embarked on a quest to rein in excessive salaries, stop the "disorderly expansion of capital" and reform many for-profit sectors in socialist ways. We can trace that campaign's start to the moment Ant Group's world-record initial public offering was pulled on Nov. 3, 2020. We can trace its end to comments from Vice Premier Liu He in March that Beijing would "actively introduce policies that are favorable to the market," right after the "uninvestable" call, and Premier Li Keqiang's statement at the start of this month that "development is the key to solving all problems in China."
Although any return to lockdowns would threaten the improvements in retail sales, it appears they may soon turn positive in China. Coupled with the 3.5% decline in March, we've had three straight months of moving backwards. The Beijing leadership is committed to turning that around, so we may soon see a repeat of the January-February jump, when "revenge spending" drove retail sales up 6.7%.
Overseas-oriented companies in Japan and domestically devoted companies in China will offer the best protection -- and chance of profits -- as Western markets continue to bleed red ink.