Simplicity is the ultimate sophistication. This week we discuss more sunshine for the Land of the Rising Sun, why mREITs with office exposure have a tough job ahead and what’s feeding power-hungry data centers.
Japan’s Nikkei index is already up 19% this year.
While Japan strategist Masashi Akutsu acknowledges a tactical correction is possible, he sees it going even higher by year-end and raises his Nikkei and Topix targets yet again. Real wage growth could help lift earnings in service sectors including restaurants, apparel, consumer durables and convenience stores. Beyond the consumer, the recovery in global manufacturing is a positive for many export industries and the semiconductor recovery should broaden to include servers, data centers and eventually other categories. Though Japan equities have been one of the best performing markets in the world over the last year as strength has been underpinned by an earnings recovery. Masashi sees a broadening of performance ahead and is focused on quality cyclicals and lagging stocks.
Financials analyst Eric Dray is cautious on commercial real estate mortgage REITs (CRE mortgage real estate investment trusts).
Office property fundamentals are weak and higher rates weigh on valuations. Eric’s three-factor framework helps contextualize challenges across the sector. First, office comprises about 30% of CRE mREIT portfolios. Low occupancy and slowing rent growth make cash flows less sustainable. Second, more than half of CRE mREIT loans were originated when the Fed Funds rate was below 1% and >90% of loans were originated with rates below 3%. Third, upcoming loan maturities increase re-financing risk.
Discussions about the power needs of AI servers were so pervasive at last week’s Utilities, Power and Clean Energy conference in NYC that some investors dubbed it the “Data Center” conference.
Independent power producers with uncommitted merchant capacity are the clear beneficiaries in the view of Senior Utilities Analyst Julien Dumoulin-Smith, and demand from new data centers will likely materialize in 2026 and beyond. From Texas to the Mid-Atlantic, there’s recognition that more may have to be done to attract investment in generation. Indeed, power procurement issues have limited the supply of new data centers, which has helped pricing for existing capacity. Senior Telecom Analyst David Barden believes we’re still in the very early stages of the AI opportunity for data centers which are focused on capturing early-stage AI training opportunities.