Highlights: The UBS 2024 mid-year outlook in Singapore (8:55)
Key insights and influential speaker views from our flagship investor conference in Singapore

Thought of the day

The broad TOPIX index in Japan hit a record high on 4 July, topping the long-standing bubble high from December 1989. This latest leg of the rally was fueled by gains for financials, which benefited from hopes of higher Bank of Japan rates, and automakers, which have been helped by a weaker currency. The yen remains near multi-decade lows against a number of currencies-with the US dollar trading just shy of 162 against the yen, a level not seen since December 1986.

Volatility could be higher than usual ahead of the US election, with trade policy in flux, and we are neutral on Japanese stocks.

But looking further ahead, we believe Japanese equities are well supported.

Domestic demand is likely to recover in the second half. We anticipate improving consumer spending in the coming months due to recovering household income, a slowdown in food inflation, and a special income tax deduction. Japan’s largest union group, Rengo, this week confirmed an average wage rise of 5.1% this year, the largest annual “Shunto” pay hike in 33 years. An eventual turn around for the yen should also help ease inflationary pressure from food and energy imports.

Corporate governance reforms are moving into the next phase. Phase two of Japan’s corporate reforms began in June, which should shift market attention from the anticipation of change (which already boosted stock prices) to actual company fundamentals. We expect companies that show progress in boosting their profitability and return on equity (ROE) through structural reforms will draw more durable interest. Unlike prior rounds of buybacks, which offered a quick jolt for shareholder returns, these changes will take some time to materialize. But the pending end in March 2025 to the Tokyo Stock Exchange's grace period for further reforms should ensure progress.

Capital spending looks set to rise. More-resilient-than-expected capital spending in the January–March quarter, which contracted just 0.4% (versus preliminary read pointing to a 0.8% decline), suggests relatively robust private demand. Alongside tailwinds from a digitalization and software push, Japan is also benefiting from friendshoring in sectors like semiconductors. Toshiba last month pledged USD 650mn in semi capex over three years to establish new production and expand existing lines. We see beneficiaries in IT services and electrical construction, including air-conditioning equipment/system companies, in a period of structural demand growth. Selectivity does remain important, though, with strong revenue recoveries in fiscal year 2023 for some companies making for more challenging comparisons with fiscal 2024.

So, we believe the building blocks for Japan’s renewed investment case are slowly falling into place. After some near-term uncertainty around the US election and seasonality, we expect Japanese equities to slightly outperform the S&P 500 through end-2024 and into the first half of next year.

At a sector level, large-cap banks look attractive, with both high dividend yields of 3.1–3.5% and incremental share buyback potential. We also like laggard cyclical stocks as inventory destocking comes to an end, and we think high-dividend stocks are attractively priced after a recent correction. We think the yen should slowly recover against the dollar as Japanese government bond yields gradually rise and the Federal Reserve begins easing. This view aligns with our expectation that the rally in US tech equities should broaden globally, creating a range of opportunities for investors in different markets and sectors, including into quality companies in Asia and Europe.