World stock markets have had a positive start to 2018, signalling a strong year for economic growth ahead.
Forefront in the optimism is Japan, whose stocks increased by over 3%—bringing it to nearly its highest in 26 years. Leading the rally were energy and financials stocks.
This comes after US stock markets closed last night with another record high.
What this means for Japan
Topix index of all First Section issues on the Tokyo Stock Exchange jumped to its highest since 1991, rising by 2.1%. The Nikkei, short for Japan's Nikkei 225 Stock Average and the leading and most-respected index of Japanese stocks, rose by 2.6%.
The Nikkei stock average surged above 20,000—something it has done before, but has not been able to sustain in the past.
The anticipated market rally in 2018 will commemorate the longest winning streak since 1989, when during the Japanese asset price bubble, the Nikkei gained for the 12th straight year.
"With a global economic expansion, Japanese companies will likely keep double-digit growth," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.
Analysts have said that the expected yen’s weakness, combined with the upbeat economic outlook, means Japanese companies will be aided in posting another record profit in the new year.
Despite the good news, analysts have also warned of a risk of volatility, with Senior technical analyst at Mizuho Securities Co., Yutaka Miura saying: "Although the weather is fine, the waves are high... there will be scattered rain."
Describing the surge, Miura also said: "More overseas market players flocked to the market in the afternoon amid hopes for higher (Tokyo) stock prices this year."
How the US plays a part
Analysts have also forecasted the dollar to trade between ¥95 and ¥120 in 2018, compared with around ¥113 in late December.
Japanese companies such as Toyota and Sony depend heavily on the US market. Construction machinery manufacturer Komatsu, for example, will receive a boost thanks to the US tax overhaul legislation enacted in late 2017.
A potential defeat of Trump's Republicans in the US midterm election in November will likely start to gradually be factored in by investors, with the Nikkei possibly dropping below the 20,000 line.
Mizuho’s Miura concludes: "Following the passage of the tax reform bill, political conflicts between Republicans and Democrats will become clearer toward the midterm elections,” adding: “The conflicts may hamper Trump's efforts to push through other policies such as his long-promised plan to boost investment in infrastructure which is scheduled to be announced in January.”
While Apple reportedly struggles to get the iPhone X off its feet and into the market, stumbling on obstacles it knew would come about, such as developing proper facial recognition and delivering on its aggressive production schedule, global stock markets are fluctuating on the back of several factors, from the disastrous hurricanes to bad European weather and Brexit talk. Black Friday, Cyber Monday and Christmas are still ahead of us however.
Here Lee Wild, Head of Equity Strategy at Interactive Investor, provides an overview of the current global stock economy, as US markets and Japan’s Nikkei put London into perspective:
“The mood on many global stock markets might well be described as exuberant, but not irrational. Yes, it took less than six weeks for the Dow Jones to add the last 1,000 points to top 23,000, but latest US company quarterly earnings are beating expectations - look at IBM's fightback overnight - and president Trump's tax plans could still deliver a boost to the bottom line.
“Japan's Nikkei has just hit a two-decade high, but exports there have risen for a tenth straight month amid demand for Japanese technology.
“That puts what's happening in London into perspective. Investors are right to be concerned about a recent spate of high-profile profit warnings, and Brexit presents its own set of special circumstances, but many companies are delivering strong results and valuations are not excessive.
“Of course, the market will correct at some point. Chatter has picked up in recent weeks following profit warnings from blue-chips GKN, Mondi, ConvaTec and Merlin, but this bunch are not a fair indicator of the market as a whole.
“Unilever's highly-rated shares have come off the boil as bad weather affected sales of its Magnum and Ben & Jerry's ice creams in Europe during the third-quarter, while hurricanes in Florida and Texas held back the Americas. However, underlying sales in emerging markets still grew 6.3% and volumes were up. With just a few months of the financial year left, annual group underlying sales are still expected to grow 3-5% and profit margins improve.
“Don't be surprised to see a pullback between now and Christmas in some markets which have raced ahead this year, but it's unlikely to be the crash everyone is predicting. While inflation is currently outstripping wages growth, the UK unemployment rate is at its lowest since 1975 and any small rise in interest rates will not pull the rug from under this market.”
