Citi analysts expect an end to Federal Reserve rate hikes after one in December 2018 and two more in 2019. While there are differing views on what the end of Fed rate hikes could mean for the Japanese equity market, Citi believes that the end of Fed rate hikes could be positive for Japanese equities.
Historically, both the S&P 500 and TOPIX had a tendency to flatten out four or five months ahead of the last rate hike. However, US equities tend to appreciate around three months after the last rate hike.
Japanese equity style indices show that from three to six months before the last rate hike – which could be from around now until February 2019 – large caps, growth, materials, trading and transport equipment tend to perform strongly.
On the other hand, between three months before the last rate hike and the month of the actual hike – electric machinery, information and communications, trading companies and services tend to perform poorly. There is also the anomaly that Japanese equities tend to perform strongly around the time of the first rate hike by the European Central Bank, which could come in 2019.
There is a tendency to expect the last rate hike to cause the yen to appreciate against the USD, but the yen has actually depreciated in a surprising number of cases – the exception being 1995. Overall, Citi remains neutral on Japanese equities as auto trade risks persist.