THE Mini Tokyo Price Index (Topix) Futures contract, a broad representation of the performance of over 2,000 publicly-owned Japanese companies, has continued to outperform its global counterparts. As at market close on Mar 5, the contract was up 15.22 per cent year to date, surpassing the Nasdaq’s 8.5 per cent gain.
Nevertheless, the Topix still remains below its 1989 peak and trails behind the closely related Nikkei 225 Index. This difference is likely due to sector composition, with technology making up around 48 per cent of the Nikkei 225, while the Topix is diversified across 33 different sectors, with electric appliances being the largest at 17.3 per cent. As we progress through 2024, we expect to see a potential broadening of the rally that could help push the Topix above its all-time high of 2,886.
We maintain a bullish stance on the Mini Topix Futures contract and expect it to hit the 138.2 per cent extension level at around 2,950 to 2,955 by the end of 2024. Based on a Fibonacci Extension drawn from the March 2023 low, our bullish thesis is validated if the contract sees a sustained close above the 100 per cent extension level at around 2,747 and breaches the all-time high of 2,886, which roughly coincides with the 123.6 per cent extension level of 2,876. A breach of its 1989 peak is likely to have a huge psychological impact on investors that could take the contract even higher.
Fundamentally, we believe much of the rally is driven by structural factors that could lead to a sustained uptrend. These include a depreciating yen, rising corporate profits, an exit from decades of deflation towards a healthy inflation rate, as well as corporate governance reforms. The resurgence of inflation is vital as companies are able to raise prices instead of having to continuously focus on cutting costs.
At the same time, concerns over China’s fragile recovery is likely to spur investors to shift their allocations away from China in favour of Japan. The recently revamped Nisa tax-free investment scheme is anticipated to boost domestic investment, which has historically been sluggish due to the Tokyo Stock Exchange’s requirement for a minimum trading lot of 100 shares.
From a valuation perspective, the Topix cash index is trading at a Last Twelve Months (LTM) price-to-earnings ratio of 16.8 times, slightly below its five-year average of 16.9 times. Furthermore, data shows that roughly 47 per cent of stocks in the Topix are trading at a price-to-book ratio of below 1.0, in stark contrast to just 4 per cent for the S&P 500.
From a technical standpoint, the Mini Topix contract appears to be on track to test the key 100 per cent extension level at around 2,747. The contract was on an uptrend before seeing a brief retracement around September 2023, only to rebound and resume its upward trajectory. Other key technical observations supporting our bullish thesis are:
1. The Moving Average Convergence Divergence indicator (MACD) shows a bullish crossover signal as the MACD line is currently above the signal line. The MACD histogram is also in positive territory, signalling bullish momentum.
2. The contract is trading above its 50-day and 200-day moving averages.
In summary, we hold a bullish view on the Mini Topix Futures contract and expect it to trend higher towards the 138.2 per cent extension level at around 2,950 to 2,960 due to favourable structural factors that justify the risk-on mood. The prevailing bullish momentum is expected to mitigate downside risks, with any near-term pullbacks seen as opportune moments for entry.
The writer is investment analyst at Phillip Nova
