Blue-chip stocks plummet, is the rally in the Japanese stock market coming to an end?

The two major stock indexes in the Tokyo stock market showed mixed performance on November 10th, with the TOPIX index slightly up by 0.1% and the Nikkei 225 index down by 0.25%. Although most of the 33 industry sectors on the Tokyo Stock Exchange saw gains that day, the overall market was dragged down by the sharp decline in blue-chip stocks such as SoftBank, Renesas, Nissan, Honda, and Sony. Despite the significant gains in the Japanese stock market this year, some analysts believe that there are increasing unfavorable factors, including the lack of corporate earnings support and the peak of US bond yields, which pose risks to the upward trend. As a result, some investors are turning to the A-share market for bargain hunting.

Among the blue-chip stocks, SoftBank saw a decline of 8.2% due to a net loss in its second-quarter financial report, mainly caused by investment losses from the bankruptcy of WeWork. Renesas Electronics fell by 4.9% after reports that the private equity firm INCJ sold a significant portion of its Renesas shares at a discount. Nissan dropped by 4.5% as the company failed to disclose its midterm plan when announcing its second-quarter financial report, causing concerns among analysts about its future prospects. Honda fell by 4.1% mainly because its full-year operating profit guidance fell short of analysts' expectations. Although the company raised its dividend, it did not announce a share buyback plan, disappointing some investors. Sony declined by 2% due to its operating profit in the previous quarter falling short of analysts' expectations.

In addition, the top gainers included Trend Micro, which rose by 14% after exceeding expectations in its operating profit for the previous quarter and announcing plans to allocate 100 billion yen for year-end dividends and 40 billion yen for share buybacks next year. Mitsui E&S Holdings rose by 13% as its second-quarter operating profit turned positive year-on-year. Shidax rose by 11% after reports that the company will be privatized. Resonac rose by 11% as its third-quarter operating profit exceeded expectations. Screen rose by 7.6% after analysts upgraded its stock rating from neutral to buy.

Since the beginning of this year, against the backdrop of the Federal Reserve nearing the end of interest rate hikes, positive signals from the economic fundamentals, and strong endorsements from Wall Street investment giants like Warren Buffett, the Japanese stock market has been steadily rising. The TOPIX index has risen by over 26% and the Nikkei 225 index has risen by over 27% so far this year. Previously, Buffett's partner Charlie Munger expressed optimism about Japanese stocks, believing that they are an obvious investment opportunity because Japan's interest rates have been only 0.5% per year for the past 10 years. These companies are indeed well-established old-fashioned enterprises that have access to all these cheap copper mines and rubber bases, so you can borrow all the money 10 years in advance to buy stocks and receive a 5% dividend.

However, some analysts believe that the Japanese stock market is facing more and more unfavorable factors, including the deterioration of global economic growth and concerns that the era of a weak yen, which supports exporters' earnings, may be coming to an end as the Bank of Japan faces pressure to tighten monetary policy.

Although Japanese value stocks have risen in the past three years, the momentum is at risk of reversing due to factors such as the lack of corporate earnings support and the peak of US bond yields. According to a previous report by Wall Street News, well-known investment bank Jefferies' strategy analyst Shrikant Kale and others wrote in their latest research report that the returns of Japanese value stocks in the past 12 months have been driven by price-earnings ratios rather than earnings support. From a historical perspective, this trend lacks sustainability.

Jefferies pointed out that the current consensus on Wall Street is that there is limited upside potential for value stocks, and the valuations of high-value companies have returned to historical average levels. Value stocks facing risks include Mitsubishi Corporation, Sumitomo Mitsui Financial Group, and Itochu Corporation, among which there are also investment targets of Warren Buffett.

While the Japanese stock market has been rising, the performance of China A-shares has been disappointing. People are becoming more optimistic that China's efforts to promote the economy and the A-share market will help end the sluggish performance this year, and the historically low valuations will attract bottom-fishers.

Tony Roberts, the fund manager of Invesco Pacific Fund UK, stated that due to the weakening of the yen's positive impact, the fund has reduced its positions in Japanese export companies such as Honda. At the same time, Roberts has increased holdings in Chinese stocks, noting that Chinese assets have relatively better investment value.