LIVE MARKETS-Nikkei/TOPIX divergence a reason to worry, SocGen says

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NIKKEI/TOPIX DIVERGENCE A REASON TO WORRY, SOCGEN SAYS

Japan's Nikkei 225 .N225 share benchmark crossed the 50,000-point level for the first time ever on Monday, and is up 12.4% this month alone, but Japan's other main index, the TOPIX .TOPX is up just 6%.

And Societe Generale in a Monday note point out this could be a reason to worry a bit.

The TOPIX, they say, more accurately reflects the overall performance of Japanese equities, while the Nikkei has been driven by "foreign demand stocks" which have benefited from the weaker yen.

Valuations of these "foreign demand stocks" are now well above their historical upper ranges, thanks to - you'll be shocked to learn - "continued buying from foreign investors" - supported by low and stable market volatility, especially in FX.

They say: "As long as risk sentiment remains constructive and volatility subdued, the Nikkei may have further upside potential."

However - and you may be able to see where we're going with this - if market, especially FX, volatility makes a come back, then suddenly things start to look a bit different.

There's a recent parallel too, as SocGen say the "widening gap between foreign demand stocks and domestic demand stocks resembles the conditions observed prior to August 2024."

You'll recall that a spike in the yen caused foreign inventors to rapidly sell their Japanese stocks and the Nikkei significantly underperformed.

They conclude: "Should market volatility rise again, history suggests a repeat of this pattern ... could be on the horizon."

"At current levels, the Nikkei should be considered a high-risk, high-return investment."

(Alun John)

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