Japan stock surge 'perplexing' amid economic struggles: Strategist

Mon, Feb 26, 2024, 2:54 PM

Miskin notes that markets are climbing while strategists are starting to trim their rate cut estimates. With the "economy strong" and an uncertain inflation outlook, Miskin cautions that if the Federal Reserve's tone becomes more hawkish, it could become "a headwind for markets" after a "great start to the year."

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Editor's note: This article was written by Angel Smith

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JULIE HYMAN: Berkshire Hathaway trending today after the firm reported record earnings over the weekend, as well as releasing its latest 13F filing the shares earlier touched a record. In his annual letter to shareholders, Buffett praised the five Japanese firms owned by Berkshire and noted raising his stake in the companies. According to FactSet since announcing their investments in Mitsubishi, Itochu, Marubeni, Mitsui, and Sumitomo, the returns in yen of those five companies ranged from a low of 185% to a high of 402%.

Our next guest today says that Berkshire is not alone in looking to Japan for some success. From more of an investing outlook both international and in the US. Here's Matt Miskin, John Hancock Investment Management, co-CIO.

Good to see you, Matt. So I know you guys look at the US primarily. But you look around the globe as well.

And I just wanted to start there with what you were thinking with Japan. Because it's not just those stocks that are doing well, we've been seeing sort of unprecedented or at least returns in Japan that we haven't seen for a long time.

MATT MISKIN: Yeah. Julie. It's a good point Japan's Nikkei looks like a cryptocurrency right now. It's just been going up this year.

And it's one of the best performers. If not, the best performer globally. The only things we would say is potential negatives.

It is a consensus allocation. So when we talk to asset managers, broker-dealers, research firms that we work with, that was the number one consensus call of 2024. In terms of how Japanese stock market has done so well, it's a bit perplexing, frankly.

The manufacturing PMI has actually decelerated. The economic data doesn't look great. In fact, they're in a recession right now.

And the stock market's at all-time high. Welcome to 2024, right? And so you're seeing actually weaker economic growth.

But what they're doing is they're devaluing the currency. They're going to do QE, or quantitative easing yield curve control forever perhaps. Because if they didn't do it, if they didn't tighten policy at the end of last year, I don't know when they're going to be able to do it.

So there is tailwinds in terms of easy policy weakening currency. But growth is weak, and it's pretty consensus. We like it internationally. We still like the US more.

JOSH LIPTON: And let's talk more about the US, Matt. Pick it up there. I'm interested, Matt, how investors have clearly tempered their expectations for rate cuts, Matt. When and how many.

Yet despite that, the market's continued to move higher. How do you explain that dynamic, Matt?

MATT MISKIN: I try to come up with an analogy on this one. And I think the Fed basically called for-- it picture yourself late night at a bar. I haven't actually done this for about 20 years. So I'm going off memory. And it's a bit cloudy.

But nonetheless, when the bartender says last call, that was the Fed last year. So when the Fed said, hey, we're going to do rate cuts. We're turning more dovish.

That was, in essence, telling the markets this is the last call for risk on rally. And then as we come into this year, the bar has been closed. The Fed has been pushing back.

So we've gone from six rate cuts priced into 3. And it might go to 0. I mean, actually Treasury yields are up today.

And so the economy is strong. Inflation is coming down. But it's not that fast.

Actually, we're getting a bit of a resurging inflation here. So the fact is that the party's still going even though the bar is closed. Usually, when the tap is closed, the party starts to clear out, it hasn't.

And so we do think that's going to be a headwind for markets. If the Fed comes back hawkish, and we don't get these cuts baked in, it's going to be tougher for stocks than after this great start to the year.

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