The valuation of tech stocks exceeds Mag 7, and Japanese stocks face adjustment risks
Citigroup issued a warning that Japanese technology stocks have become overheated, with valuations even surpassing those of American tech giants, but profitability has not kept pace. Currently, there are multiple warning signs in the market: the yen's unusual movement and a disconnection between stock prices and fundamentals. If the market corrects, the Nikkei index could fall to 48,000 points
According to the Wind Trading Platform, Citigroup analysts issued a clear warning regarding the booming Japanese stock market in their latest Japan strategy report on November 6.
Although the long-term outlook remains bullish, the report suggests that short-term adjustment risks led by technology stocks are accumulating. For investors who have already made substantial profits in Japanese stocks, the multiple overheating indicators pointed out in this report are key references for assessing current position risks.
Technology Stocks Overheating: Valuations Exceeding the U.S. Seven Giants
The core warning of the report is the overheating phenomenon in the Japanese technology sector. Its stock price trends have decoupled from its own earnings trends, blindly following the footsteps of the U.S. "Seven Giants," despite the significant differences in their earnings momentum. Citigroup believes that this rise detached from fundamentals is unlikely to be sustainable.
The report bluntly states: “In terms of PEG (Price/Earnings to Growth ratio), the valuation of the MSCI Japan IT sector not only exceeds that of the Tokyo Stock Exchange index but has also surpassed that of the 'Seven Giants'... This pattern is a typical characteristic before the sector's stock prices peak.”
Multiple Anomalous Signals Indicate Adjustment Risks
In addition to the technology stock valuation bubble, the market is also showing several highly unusual signs. The ratio of the Nikkei 225 index to the Tokyo Stock Exchange index has risen to historical highs, deviating from the moving average by nearly four standard deviations, with this significant deviation almost entirely contributed by technology stocks. Furthermore, the direction of the yen exchange rate is also contrary to the interest rate differential. Citigroup attributes these market anomalies to signs of an impending adjustment:
“Although we do not see a clear catalyst for an adjustment in Japanese technology stocks or the entire Japanese stock market, in hindsight, these are often precursors to corrections: 1) The yen's movement (devaluation) is opposite to the direction of the Japan-U.S. interest rate differential; 2) The valuation of the Japanese IT industry is higher than that of the 'Seven Giants'; 3) The NT ratio exceeds the historical average by nearly four standard deviations; 4) The Nikkei 225 index level exceeds analysts' composite target price.”
Citigroup's simulation shows that if the NT ratio returns to the normal range of two standard deviations, the Tokyo Stock Exchange index and the Nikkei index will fall back to 3200 points and 48000 points, respectively. Although the report maintains a long-term optimistic view on the Japanese stock market and believes that any pullback will be "healthy," investors need to be prepared for the risks of yen appreciation, stock market decline, technology stock pullback, and NT ratio decrease in the short term
