【MACRO Alert】The possibility of Trump winning the election is closely linked to market conditions! Could Japan become a big winner from this?

After a setback in the latest televised debate, the prospects for U.S. President Biden's re-election appear somewhat bleak, which has sparked investors' concerns about the potential impact of changes in the Democratic candidate on the stock market. In this broader context, Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan, discussed an interesting phenomenon in a telephone interview: market dynamics seem to be closely linked to the possibility of Trump winning the November election. It can be observed that since March, this correlation has begun to emerge whenever the market performance synchronizes with Trump's election prospects.

However, Tomo Kinoshita also cautions that this does not directly imply that market participants support Trump's policies. He emphasizes that the market tends to avoid uncertainty. As the possibility of Trump's victory increases, the market seems to respond positively to this predictability. Tomo Kinoshita also mentioned that at the beginning of 2024, the market also showed a positive correlation with Biden's lead. The market has shown a positive reaction to a clear victory for either of the two candidates. Meanwhile, the uncertainty of the Democratic candidate list may increase the possibility of Trump's victory and the Republican Party's win in the congressional elections.

Since the debate on June 27, speculation about Biden potentially dropping out of the race has been increasing due to his unsatisfactory performance. Democratic insiders have expressed concerns about Biden's health and ability. Although White House Press Secretary Karine Jean-Pierre clearly stated on Wednesday that Biden will not withdraw from the campaign, in some betting markets, Vice President Kamala Harris's popularity has already surpassed Biden's.

In addition, predictions from PredictIt show that the probability of Trump winning the election has reached 59%, while Biden's has dropped to about 16%. Polls indicate that although the competition remains fierce, Trump's approval ratings have declined. According to a poll released by Suffolk University and USA Today on Tuesday, Trump leads Biden by 3 percentage points among six candidates, while a month ago, their approval ratings were neck and neck. Tomo Kinoshita provided a chart showing the three-month rolling correlation between Trump's election prospects based on PredictIt predictions and the S&P 500 index, which is currently at 0.31. Although this number is not high, it shows that there is a certain positive correlation between the possibility of Trump winning the election and market trends.

At the same time, the correlation between the 10-year U.S. Treasury yield and the S&P 500 index is close to zero, indicating that they currently have almost no influence on each other. Jeff deGraff, the founder of Renaissance Macro Research, pointed out that, although statistically insignificant, the negative correlation between Biden's approval ratings and the S&P 500 index is more explanatory of this year's stock market performance than other factors. Some investors and strategists believe that Trump's victory in the election is beneficial to the market because he may extend the tax cuts of 2017 and further relax regulations.

Morgan Stanley's equity strategist Mike Wilson mentioned in a report that clients are showing renewed interest in small-cap and cyclical stocks that performed well after Trump's victory in 2016. However, he also warns investors to be aware of the significant differences from 2016, but despite this, Japan seems to have become a big winner of the “Trump comeback”!？

Japanese stocks continued to rise in early trading on Friday, with the two major stock indexes hitting new historical highs. Trump is leading in the U.S. election, and investors are optimistic about the Japanese market, believing it may replicate the strong performance after Trump's election in 2016. Strategists point out that a weak yen and a manufacturing-dominated Japanese stock market will benefit from Trump's policies. Tomo Kinoshita, a strategist at Invesco Asset Management Japan, emphasized that the rise in U.S. bond yields and the depreciation of the yen will support the Japanese stock market. Although the Japanese stock market has been overlooked, the recovery of the Asian economy and Japanese companies' focus on corporate governance have revitalized the market.

The yen has fallen nearly 13% against the U.S. dollar this year, becoming the worst-performing currency among major currencies. The depreciation of the yen is expected to boost the Japanese economy, benefiting the exports of manufacturers such as Toyota and Nissan. Manufacturing accounts for more than half of Japan's total market value, making the Japanese stock market a focus for investors. In addition, the valuation attractiveness of Japan is also an important factor. Among major markets, Japan's growth stock valuations are the most attractive, with the price-to-earnings ratio of the MSCI Japan Growth Index at 22 times, based on one-year forward blended earnings expectations.

However, there are also views that Trump's re-election may not be entirely beneficial to the Japanese stock market. Jasmine Duan, a strategist at the Royal Bank of Canada, believes that if Trump is re-elected, Japan will not be the safest market in Asia. If the yen continues to depreciate, the Trump administration may take measures to force the yen to appreciate, which could be more beneficial to the Chinese stock market. On the other hand, as global funds anticipate that Trump will adopt a tougher policy stance, they may withdraw from other Asian markets, from which the Japanese stock market could benefit. With the Bank of Japan's policy becoming more neutral, bank stocks are expected to perform better.

The Bank of Japan has also shown no signs of tightening monetary policy, and investors are optimistic about the economic outlook. They believe that as inflation picks up, the economic prospects are heading in a positive direction. Bank stocks have risen due to expectations of increased loan profit margins from rising yield rates, while insurance companies have been boosted by expectations of improved profitability through bond investments.

Although the market has responded positively to the prospect of Trump's possible re-election, and the Japanese stock market has shown an upward trend as a result, investors should also remain cautious and pay attention to the long-term impact of the election results on global economic policies and market sentiment. As strategist Tomo Kinoshita pointed out, while short-term market dynamics may be closely related to the election results, ultimately, the fundamentals of companies, economic data, and policy direction will determine the long-term performance of the stock market. Therefore, investors should consider a variety of factors comprehensively when making decisions to ensure stability in the ever-changing market environment. As the global economy gradually recovers from the pandemic and central banks' monetary policies are gradually adjusted, the market may face new opportunities and challenges. In this context, keeping a close eye on the Japanese stock market and other global markets will help investors grasp future investment trends.