Foreign investors may at last be returning to Japan’s stock market after a six-year sell-off, amid the growing realization of an opportunity that no other place can provide, a top fund manager says.
Comgest Asset Management Japan Ltd. expects Japan’s profit growth to outpace that of the U.S., as corporate taxes will “almost certainly” rise under U.S. President-elect Joe Biden. The Tokyo Games and a recently forged Asia trade pact will all serve as additional reasons for investors to seek Japan-specific exposure.
The euphoria building since last month over hopes for an end to the pandemic has driven U.S. and global stock indexes to all-time highs. While the 225-issue Nikkei average is up 13% this year — near the highest level since 1991 — it’s still 31% below its 1989 bubble-era record.
“This sense of going back to the peak level of maybe 30 years ago, I think it makes Japan quite an exciting story right now that we certainly don’t get in any other major markets of the world,” said Comgest portfolio manager Richard Kaye, whose $4.8 billion (¥496 billion) Comgest Growth Japan fund has beaten 97% of its peers this year.
Nomura Securities Co. estimates that about ¥2 trillion to ¥3 trillion will flow into Japan’s stock market next year from abroad. JP Morgan Asset Management also expects inflows.
Foreign funds have made large purchases of Japanese equities since early October, but their net sales in the cash and futures markets for the year still total about $62 billion. That’s on top of the $134 billion they unloaded over 2015 to 2019, following strong buying that immediately came after former Prime Minister Shinzo Abe’s rise to power in late 2012.
Japan’s slow economic growth, large national debt and aging population are often cited as culprits for the sell-off by overseas investors. Some market observers now point to a number of reasons why they may be considering coming back, including earnings growth, relatively low valuations and a high proportion of cyclical stocks.
The Topix index is trading at about 18 times 12-month forward estimated earnings compared with over 22 times for the S&P 500 Index.
Toru Ibayashi, the head of Japanese equities research at UBS Group AG’s wealth management arm, warns that the renewed interest being shown by foreign investors may lose steam when the earnings recovery peaks out following the January-March quarter. He also notes the appeal of Japanese stocks has been hurt by their decreasing weight in MSCI indexes amid increases for Chinese equities.
Comgest’s Kaye argues that bears need to distinguish between Japan as a country and as a market. Local demographics and debt levels aren’t relevant when a growing proportion of profits come from outside of Japan, and especially from China, he said.
Alexander Treves, an investment specialist at JP Morgan Asset, agrees the nation is misperceived, and notes that there are fewer stocks that are “covered well” by analysts in Japan than in the U.S. or Europe.
“I think a lot of people get confused between economic growth and whether or not a stock market is attractive,” said Treves. “We can find misunderstood or mispriced opportunities other people just aren’t looking at.”
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