This year’s Japanese stock rally has a surprise leader: pharmaceutical companies, which tend to lag behind the market when it gains.

Drugmakers soared 22 percent, the most among the 33 industry groups on the benchmark Topix index, compared with a 10 percent gain for the Topix itself.

The Topix Pharmaceutical Index climbed to its highest on record on March 24, and earnings multiples are about twice the market average. The Topix has beaten pharmaceutical shares in 12 of the past 17 years it rose.

“Valuations are ridiculous, and foreign investors are scratching their heads,” said Richard Whittall, a fund manager at Alltus Capital (U.K.) in Singapore who’s watched Japanese stocks for 25 years. “You’ve seen these underowned areas of the market just go up, up and up. Japanese institutions like buying these stocks. They feel safe.”

Ichiyoshi Asset Management Co. says the gains have a logical explanation, as local fund managers searching for an income stream are dumping sovereign bonds and buying drug stocks for their dividends. For Hajime Kitano, a strategist at Barclays PLC in Tokyo, it’s a sign investors aren’t as bullish as they appear.

While the Topix has lost about half its value since the height of the bubble economy in the late 1980s, the Topix Pharmaceutical Index is more than 70 percent higher. Carmakers and manufacturers of tires and precision instruments are the only other industry groups to post an advance.

The drugmaker rally pushed valuations to 33 times estimated earnings on March 24, compared with 17 times for the Topix. Eisai Co., which surged 79 percent this year, is trading at 101 times expected profit, data compiled by Bloomberg show. Of 18 analysts tracking the company, 12 have a sell rating on the shares, the data show.

“It’s a bubble,” Whittall said. “These sort of things never go on forever. It eventually becomes ridiculous. In my book, it’s already ridiculous.”

For Mitsushige Akino, an executive officer at Ichiyoshi Asset in Tokyo, investors have little choice but to keep buying while Bank of Japan asset purchases hold down yields on government debt.

“Investors are using these stocks as an alternative to bonds,” he said. Drugmakers “have stable earnings and their shares aren’t volatile. This will continue until there’s a possibility of higher interest rates.”

Japan’s 10-year government debt yielded 0.33 percent at the end of 2014, when the rally in pharmaceutical stocks accelerated, compared with a 2.4 percent dividend yield for drugmakers and 1.7 percent for the Topix.

Record stimulus by the central bank shows no signs of abating. The BOJ’s key inflation gauge ground to a halt in February, leaving its 2 percent target ever more distant.

Gentoku Kiyokawa, the Tokyo-based director of investment management at BNP Paribas Investment Partners Japan, says the gains in drugmakers are due to global pension funds increasingly using smart-beta strategies, which pick stocks by criteria other than market value.

“If you rank by profitability and efficiency instead of market cap, weightings to pharma will be bigger,” he said.

The members of the Topix Pharmaceutical Index have an average profit margin of 7.9 percent, compared with 4.4 percent for the broader gauge, according to data compiled by Bloomberg.

It’s rare for pharmaceutical stocks to beat the Topix when it rallies. In 2013, when foreign investors sent the market up 51 percent amid euphoria about the policies of Prime Minister Shinzo Abe, the gauge of drug stocks rose 39 percent. In 1999, when technology companies spurred a 58 percent surge in the Topix, health care shares climbed just 2.3 percent.

“When defensive shares outperform, it means investors are bracing for recession,” said Kitano, the Barclays strategist. While gains in the benchmark indexes make it look like investors are bullish, the industry advances tell a different story, he said: “People are afraid of buying risky assets but they have to invest in something, so they turn to defensives.”

There has been some good news for Japan’s drugmakers. For Eisai, which is leading the industry rally this year, an early-stage study published in March showed partner Biogen Idec Inc.’s experimental drug for Alzheimer’s slowed progression of the disease. The 19 percent advance in the biggest drugmaker, Takeda Pharmaceutical Co., comes as the company says it expects to see a turnaround with new products bolstering growth.

Whittall at Alltus Capital is unconvinced. He says the rally is partly due to investors switching into stocks that had been underperforming, but that doesn’t fully explain it. “This is so odd,” he said. “It’s crazy. This index is not just higher than 1989, it’s miles higher. It’s due to come down.”

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