The Nikkei Average Faces a Test from Rising Japanese and U.S. Interest Rates; Focus on Small and Mid-Cap Stocks with Strong Earnings (Kubota Masayuki (窪田真之))

The story

The Nikkei 225 has remained firm recently, despite concerns over rising US and Japanese interest rates and geopolitical risks, supported by strong corporate earnings. Over the past two weeks, the Nikkei 225 has risen ¥2,352 (3.7%) to around ¥66,364. While a combination of shocks is limiting the upside, momentum is also providing downside support.

Rising US and Japanese long-term interest rates have been cited as a source of concern. In September, the US Federal Reserve raised interest rates, as did the Bank of Japan. With further rate hikes expected in both countries, crude oil prices have edged lower despite the prolonged situation in the Middle East.

Results for the April–June quarter among companies in the TSE Prime Market were solid. Many companies posted substantial year-on-year increases in net income for the period, and upward revisions to full-year forecasts have also increased. Against this backdrop, large-cap stocks may face resistance on the upside, while the relative value and strong earnings of small- and mid-cap stocks are reportedly receiving greater recognition.

As an investment strategy for Japanese equities going forward, the author expects small- and mid-cap stocks to gain prominence as large-cap stocks face resistance on the upside. The author says this is a time to consider investing mainly in undervalued small- and mid-cap stocks with strong earnings, and concludes that a focus on individual stock selection will be important.

At a glance

Market trendsThe Nikkei 225 rose 3.7% over two weeks to around ¥66,364, according to reports.

Interest rate trendsThe Federal Reserve and the Bank of Japan each raised interest rates in September, while rising long-term interest rates were cited as a source of concern, according to reports.

Crude oil trendsCrude oil futures declined slightly despite the prolonged situation in the Middle East, according to reports.

Company performanceNet income at TSE Prime-listed companies rose sharply year on year in their March–June quarter results, and upward revisions to full-year forecasts increased, according to reports.

Investment PolicyAs large-cap stocks faced resistance on the upside, small- and mid-cap stocks were seen gaining prominence, and a buying strategy focused on undervalued companies with strong earnings was suggested, according to reports.

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What it links to

Rising Policy Rates and the Transition to an Interest-Bearing WorldStrongly related1 companies

8550-6.1%

THE TOCHIGI BANK,LTD.The Transition to a World of Positive Interest Rates and Higher Policy Rates

¥966

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The Nikkei Average Faces a Test from Rising Japanese and U.S. Interest Rates; Focus on Small and Mid-Cap Stocks with Strong Earnings (Kubota Masayuki (窪田 真之))

The story

What it links to

Where this came from

The Nikkei Average Faces a Test from Rising Japanese and U.S. Interest Rates; Focus on Small and Mid-Cap Stocks with Strong Earnings (Kubota Masayuki (窪田真之))