History suggests Japanese stocks could bounce back after Ishiba-led decline: Citi By Investing.com

Investing.com — Japanese stocks have been under pressure recently as investors worry that Shigeru Ishiba’s ascension to Japan’s top political position is bad news for stocks, but Citi suggests buying the dip as history shows that this political shock typically has no staying power. .

“We expect Japanese stocks to pick up on their own as we head into the end of the year,” analysts at Citi said on Monday, following the recent wobble in Japanese stocks following the election of Ishiba as Japan’s prime minister.

Ishiba has been elected leader of the ruling Liberal Democratic Party has signaled plans to dissolve the Lower House in a vote on Oct. 27, triggering a retreat in Japanese stocks as investors view Ishiba as “equity negative,” analysts said .

But history shows that swings in Japanese stocks during meltdowns tend to be short-lived.

“Japanese stocks tend to rise for two to three months after a meltdown, and this trend has intensified since the early 2000s,” Citi analysts said in a Monday note.

The market’s reaction to Ishiba’s election win is reminiscent of what happened when Prime Minister Kishida took office, Citi says, recalling the more than 7 percent correction that followed due to the “Kishida shock” in the week after his victory.

Similarly, the pullback from the “Ishiba shock” could drop to the 2,500-2,550 range by about 36,000, Citi estimated.

While Ishiba’s proposed policy measures — including the possibility of raising the capital gains tax and the corporate tax — are less market-friendly, expectations that he is likely to keep the same staff in key cabinet positions suggest that there little chance of deviation from the policies of the Kishida administration of his predecessor.

“We think there is little chance that the government will turn to negative economic policies to the extent that the market appears to be predicting,” Citi said.

But Citi believes the “Ishiba shock” will be short-lived as there is “little chance of drastic changes to the economic policies that have been pursued by the Kishida administration.”

The bank points to several factors that support this view, including Ishiba’s lack of experience in major economic portfolios and his recent indications that he intends to follow the economic policies of the Kishida administration.

Japanese stocks have plenty of ammunition to rally towards the end of the year, Citi says, supported by “potential upward revisions to company plans mid-year and the tendency for Japanese stocks to rise as the Federal Reserve enters a rate cut . cycle.”