A look at equity markets in Japan and China
The Japanese and Chinese stock markets have not performed in line with the main western markets in recent decades. Here’s why.
On a day when Wall Street has reached new all-time highs, there has been some favourable effects on equity markets around the world. The bulls are buying, hoping that there will be some modest trade deal soon between the US and China. Meanwhile, all can enjoy the benefits of low-interest rates and more money available as central banks seek to boost weak economies.
The Japanese and Chinese stock markets have not performed in line with the main western markets in recent decades. Whilst day-to-day they often react in a similar direction to the same world news about trade or interest rates or Wall Street, the underlying pattern of prices has been very different.
The Japanese equity market reached an all-time high as long ago as 1989 and is still at 23,250, way below the level of around 39,000 it reached then. The Shanghai index hit an all-time high of more than 6,000 in 2007 and is still around half the level it then reached. These are reminders that whilst shares can, usually, in the longer term be relied on to deliver decent growth as companies overall earn more revenue and post more profits, markets can sometimes reach extreme values which are impossible to sustain and can lead to long periods of disappointment for those who bought near the highs.
The Japanese experience is of particular interest as it went through a more intense version of the boom/bust cycle the West suffered at the end of the last decade. By end 1989 Japanese property and share values were grossly inflated, pumped up by a large credit expansion and sustained by high expectations of what the Japanese economy could go on to achieve.
The puncturing of the bubble was severe, with big collapses in asset prices and difficulty in promoting growth. Commercial banks were badly damaged as the values of assets held as security plunged. The Japanese equity market settled down to three decades of moving in a range well below the old highs, as investors adjusted to the new reality of a mature, rich economy with a declining population. It has led people to ask if the Japanese policies of money creation, Central Bank bond-buying and substantial public investment on borrowed money might become the norm elsewhere following the western banking crash.
Pressures from the Chinese boom
China has offered fast growth over the last twelve years, transforming a low-income economy by a combination of export-led industrialisation and more recently rapid growth in technology and services. The share market has been subject to big pressures both ways, with speculative booms in 2007 and again in 2015. In 2015 the authorities called a halt to the enthusiastic buying, much of it on borrowed money, just before the market hit a new all-time high, only to see it halve as the speculative excesses were forced out.
Today Japan is often written down for its low rate of overall GDP growth. If you adjust this for the decline in population the performance is not so bad in comparison to the US, where GDP growth is flattered by growth in the population. China is gradually opening up its markets to more foreign capital and influences but has shown that her share market is prone to bouts of domestic speculation that has caused big swings in valuations. There is also a discount applied all the time China is in dispute with the US and all the time local rules and restrictions put off various potential foreign investors.
Both Japan and China will benefit from a genuine breakthrough in US/China trade relations. We have been preferring Japan to China in recent months, given the longer-term issues affecting China’s relations with the West and the slowdown that is now visible in China’s economy. The recent news of a tiny cut in one of China’s lending rates is a reminder that the authorities think they have limited room to reflate at a time of slowdown. The Chinese manufacturing economy has struggled in this general manufacturing downturn worldwide.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.