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Market Scramble: Not all exporters benefiting from yen sell-off

TOKYO -- Japanese stocks' post-election rally continues on the back of a weakening yen. But skepticism that the yen will keep falling has dampened sentiment in areas such as the automotive sector, curbing what could otherwise be a market-wide blowout.

The Nikkei Stock Average has recovered handsomely from a plunge immediately following the election of Donald Trump as U.S. president, climbing 1.1% to 17,862 on Wednesday. The psychologically significant 18,000 mark is now within reach, with the index having risen 4% since Nov. 8.

A Trump presidency was hardly the only surprise to come out of the election. The yen, expected to rapidly strengthen in the event of a Trump victory, has instead weakened by nearly 5 yen to the dollar over the past week, and stood at the 109 level -- the weakest in around five and a half months -- Wednesday. If that rate holds, operating profit at 25 leading Japanese companies for the six months through March 2017 will receive a roughly 400 billion yen ($3.65 billion) boost. Some 80% of that windfall would go to seven companies, including Toyota Motor.

A weak yen typically leads to impulse buying of export stocks. But investors are more circumspect this time around, at least in the auto sector. Japanese automakers did rally Wednesday. But Suzuki Motor ended the day 6% below its Nov. 8 level. Mitsubishi Motors is down 2%, while Nissan Motor has slipped 0.5%. This runs counter to the wider market's surge and hefty gains by other exporters. Construction equipment maker Komatsu, for example, has climbed 12% despite Trump making an unfavorable comparison to Caterpillar of the U.S., while Mitsubishi Materials has risen 13.9% even amid potential fallout from the president-elect's trade protectionism.

"There's no way I'm buying auto stocks right now, even if the yen is weak," an official at a Japanese asset management firm said. Instead, the company has begun shifting assets into electronics stocks, which are undervalued and offer brisk earnings. The dollar's current strength rests on the fact that markets "are only looking at the upsides of Trump's economic policies," the official said.

A rise in U.S. long-term interest rates, fueled by the prospect of tax cuts and infrastructure investment, accounts for the surge in yen-selling. But Trump remains a black box in terms of true political convictions: the bombastic, protectionist rhetoric on trade that defined the president-elect's campaign has largely quieted down since his victory, for example. "The yen's weakness could stick around only until January, when specific policy plans are revealed," said Mitsushige Akino of Ichiyoshi Asset Management.

Pitfalls for carmakers

Yet despite uncertainty in the foreign exchange market, investors across the world are still seeking out value stocks and shares linked to broader economic performance. Under ordinary circumstances, this interest should extend to automakers, where performance rests on consumer spending. But several other factors make those shares' prospects tough to nail down.

First is Trump's pledge to slap hefty tariffs on imports from Mexico. This would weigh heavily on Japanese automakers such as Nissan and Mazda Motor, and could impact parts makers such as TPR, whose shares have slid 4.6% since Election Day.

Shifts in emerging-market currencies and slowing emerging economies are another concern. Companies such as Suzuki, which holds a large share of the Indian auto market, and Mitsubishi Motors, which boasts strong Southeast Asian operations, have fared particularly poorly over the past week.

Trump's "America-first" ideology could hurt Japanese automakers as well. While past trade friction between Japan and the U.S. is unlikely to rear its head, U.S. consumers could still feel pressure to buy American.

But not all export stocks are feeling the crunch. Toyota and Honda Motor, for example, continue to pull in investors who see the automakers absorbing whatever punches the Trump administration throws. The market seems to have faith in Sony's earnings power as well, thanks to structural reforms in recent years.

At a glance, investors seem still to be in the throes of a Trump fever. But a shift in focus back to earnings potential has begun beneath the surface.

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