Investing.com -- Japanese equities have staged a sharp recovery in April, with the Nikkei 225 breaking above 60,000 and hitting year-to-date highs, but Citi says investors need not fear a repeat of last year's tech-driven correction.
The rally has been heavily concentrated in AI and semiconductor-related stocks, pushing the Nikkei/TOPIX ratio to an all-time high of 16.2.
Citi noted that "the rise in the N/T ratio in April can be almost entirely attributed to outperformance in the electric appliances and information and communications sectors," which carry high Nikkei 225 weightings.
A similar dynamic is said to have played out last September and October, when high-tech stocks subsequently underperformed from November as the Nikkei corrected.
This time, however, Citi sees a different outcome as more likely. "Unlike last November, the high-tech sector shows little sign of overheating, which suggests the risk of correction is not high," the bank wrote.
The firm pointed to a sharp increase in global semiconductor sales, an MSCI Japan IT earnings revision index running above the broader market, and a price-to-earnings-growth ratio currently below that of TOPIX as evidence that valuations remain reasonable.
Rather than a tech-led selloff, Citi expects the elevated Nikkei/TOPIX ratio to normalize through laggard stocks catching up.
The bank argued that if Middle East uncertainty eases, investor interest is likely to broaden from high-tech momentum names into sectors such as construction, real estate, finance, defense and energy, all of which carry significant TOPIX weightings.
Citi believes this will drive a gradual rebalancing rather than a sharp correction.