Investing.com-- A bear market rally in Japanese stocks was possible as foreign investors remained on the sidelines, JPMorgan (NYSE:JPM) analysts wrote in a note, although this trend also spurred doubts over the sustainability of an ongoing rebound in the market.
Japan’s Nikkei 225 and TOPIX indexes both slumped into a bear market last week, as they plummeted over 20% from recent record highs.
While both indexes did rebound sharply from the losses, JPM argued that the rebound was driven chiefly by “contrarian domestic individual investors and domestic institutional investors.”
The brokerage also attributed a bulk of the rebound to dip buying, and stated that it had not observed a strong trend of foreign investors returning into Japanese markets.
This made it “premature to conclude that we have entered a sustained relief rally,” JPM analysts wrote.
“We cannot rule out the possibility that the current rebound is no more than a bear market rally. The extent to which domestic investors can push the market back up until foreign investors make a full return is crucial, putting their “ability to hold” to the test.”
Foreign investors had aggressively sold Japanese equities last week, with JPM stating that there was no indication that they had returned to Japanese markets during the recent rebound.
What little foreign buying that did occur was geared more towards defensive buying or into banks, which are expected to benefit from higher interest rates.
Sentiment towards Japanese markets was decimated by hawkish signals from the Bank of Japan during an end-July meeting, where the central bank hiked interest rates and flagged more increases this year.
Stronger-than-expected gross domestic product data released on Thursday, while presenting a positive outlook for the Japanese economy, also gives the BOJ more headroom to raise interest rates further.