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How foreign investors boosted Japan stocks in May

The Nikkei 225 rose more than 5% in May, thanks in part to foreign investors. Max Kettner, Chief Multi-Asset Strategist at HSBC, joins Yahoo Finance Live to discuss the Japanese market's strength.

Video transcript

JULIE HYMAN: Let us talk overseas a little bit here. Japan led global equities higher in May. As US lawmakers battled over the debt ceiling, we were seeing some reforms happening in corporate Japan. Let's take a look at the bigger picture, and what we can expect for the rest of the summer with Max Kettner, HSBC chief multi-asset strategist.

Max, I wrote earlier in the week about the strength we've been seeing in Japan and this debate now. In the past, we've seen foreign investors come into Japan. And then they leave again. And we talk to a couple of folks this week who said, well, maybe this time is different. They're making some fundamental reforms in improving return on equity over there. What's your view on Japan?

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MAX KETTNER: Look, Japan on the equity side were just neutral really. Because the problem is, this time is different. I think always of the famous last words. So I'm always cautious on using them.

But really, the point is about Japanese equities. Why have they rallied so much since the start of the year? Well, quite simply because people were really much more afraid of the Bank of Japan changing course, much more dramatically, much earlier. And that is what's not happening at the moment.

So as a result, we've seen, obviously, the dollar weakness since the start of the year since Q4 2022. But at the same time, we've seen dollar strength against the Japanese Yen. So the Japanese Yen, when we look at that, has been depreciating really quite dramatically over the last couple of months, as really there isn't really any dramatic change in the Bank of Japan policy in sight any time soon. And that, of course, supports some of that earnings picture in Japan as Japan still has a huge, huge share of foreign revenue exposure.

So it's really much more I think the Bank of Japan and FX story that temporarily now really supports the Japanese equity market. I would be, however, ever careful because after this strong rally now, and after this easing of domestic, not only global, but also domestic financial conditions, it only needs a handful of maybe one or two above consensus inflation print in Japan. And this whole story, this whole concern around, will the Bank of Japan widen or maybe even abandon its yield curve control? And all that could lead to a stronger Yen, ultimately. And that would then weigh, again, on Japanese earnings.

BRAD SMITH: And so with that in mind, much of the focus now, even as we discussed Japan, and even as we discuss the Asia-Pacific equation right now, what does that mean for some of the emerging markets that some investors would have looked at in the past?

MAX KETTNER: I think, Japan has, obviously, been one of those countries that's been benefiting perhaps from some of the money going out of China and out of the Chinese equity markets as those indices simply weren't really the right ones to capture this kind of domestic and consumption driven recovery that we're seeing in China right now. So that also has perhaps a bit of an expiry date.

But I would say, other equity markets in Asia, if we look, for example, about ASEAN and the reopening, think about tourist arrivals really sky high and large parts of ASEAN, and other markets as well, like Korea that are very well balanced between the value and growth components, that is quite a positive for some markets like that as well

And India as well. India's got this longer term thematic story, that longer term convergence stories. So, of course, it's expensive. But let's remember, India has always been on the expensive side of things in the better part of the last 10 years.

But the convergence story still is very much alive there. So there are really pockets outside of China and outside of Japan that are really still working. ASEAN, Korea, India, all of those are still quite attractive.

BRAD SMITH: All right. Max Kettner, HSBC chief multi-asset strategist. Max, thanks so much for taking the time here with us today. I appreciate it.