Stock Traders’ Guide to Navigating Takaichi-Trump Summit

a9[0}k47144xeibf]il199tu_media_dl_1.png International Energy Agency

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(Bloomberg) — Japan’s equity investors will closely watch a meeting between President Donald Trump and Prime Minister Sanae Takaichi in Washington on Thursday for possible agreements on economic and military cooperation.

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Any details on Japan’s $550 billion government-backed investment plan in the US has potential to impact energy and shipbuilding sectors. Defense stocks may react as Takaichi faces a diplomatic challenge after Trump called on Japan to deploy warships to the Strait of Hormuz and then withdrew the demand. 

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With the Iran war set to enter its fourth week, investors are waiting to see how the leaders will respond to a surge in oil prices that has pulled Japan’s benchmark indexes off record highs. The Bank of Japan added the Middle East to its list of risk factors as oil extended gains.

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“Clearly this summit is important,” said Piergaetano Iaccarino, the head of equity solutions at Amundi Ireland Ltd. “It confirms the strategic alignment between Japan and the United States, especially at this time when the economic security and industrial policies are getting more and more important.”

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Other market-moving topics may touch on trade tariffs, currency policy and relations with China.

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Energy Firms

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Japan and the US are making final arrangements to announce a second round of potential projects as part of the $550 billion investment pledge, NHK reported on Wednesday. They are set to issue a joint statement outlining three projects including a next-generation nuclear reactor in Tennessee and natural gas power generation facilities in Pennsylvania and Texas, according to the report, which said the second round of investments may total as much as $73 billion.  

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Mitsubishi Heavy Industries Ltd., Toshiba Corp. and IHI Corp. have shown interest in a Westinghouse Electric Co.-led project worth up to $100 billion, according to a government fact sheet released in October. Hitachi GE Vernova was also named for possible involvement in the construction of advanced nuclear reactors.

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“The US investment plan is likely to be a catalyst for the energy-related stocks,” said Hisashi Arakawa, head of Japan equities at Aberdeen Investments, who invests in Hitachi Ltd. “When security issues make it difficult to turn to Chinese firms, Japanese companies like Hitachi naturally emerge as the leading candidates.”  

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Defense Shares 

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Discussions of increased defense spending or closer US-Japan military cooperation could spur speculation that revenue will increase for companies like Kawasaki Heavy Industries Ltd. and Mitsubishi Heavy. Japan is planning to tell the US at the summit that it will join Trump’s “Golden Dome” missile defense initiative, according to a Yomiuri newspaper report last week. 

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“Given the external environment, defense is sensible to focus on,” said Chris Smith, co-manager of the Japan Value Fund at London-based Polar Capital. “What’s going on with Iran has probably made Japan even more of a critical partner for the US in Asia and Japan is well positioned to play into that.”