Japan is fast becoming the most favored developed market with investors as conviction grows that a rally taking the Topix to the highest since August 1990 will accelerate.
(Bloomberg) — Japan is fast becoming the most favored developed market with investors as conviction grows that a rally taking the Topix to the highest since August 1990 will accelerate.
Strategists at Goldman Sachs Group Inc. to Macquarie Group Ltd. say the case for a bull run is solid with corporate governance reforms set to boost valuation and loose monetary policy adding tailwinds. The economy, long beset by deflation, is seeing a revival in price pressure as activity revs up — a combination that sets it apart from the stagflation woes stifling developed peers in the US and Europe.
The Topix benchmark climbed 0.6% to close at 2,127.18 on Tuesday, taking gains this quarter to 6.2%. That compares with a less than 1% advance for the S&P 500 and a sub-2% rise for the Stoxx Europe 600 index. The Nikkei 225 Stock Average rose 6.4% during the period.
“We have entered a two to three year bull market period for Japan now, this has legs,” said Neil Newman, deputy head of Japan research at Macquarie Capital Securities. “Japan has breadth and depth, liquidity is good and with corporate earnings looking solid now, this will draw further attention.”
The world’s third-largest economy stands out as overseas investors have qualms about investing in the other Asian giant — China — with its increased geopolitical risks and the policy whims of Beijing. Warren Buffett’s renewed endorsement of Japanese stocks has also provided hope that foreign investment is returning to the market.
Overseas traders bought a net $15.8 billion worth of the nation’s stocks in April, the most since October 2017, according to Tokyo Stock exchange data.
“Domestic and foreign investors are positive about Japan relative to the US and Europe, as it does not face an imminent recession and yet has very low valuations,” said John Vail, chief global strategist at Nikko Asset Management Co. “There is a strong possibility that it will outperform global markets.”
A renewed push by companies to increase buybacks and focus on returns is boosting sentiment, after the Tokyo Stock Exchange called on firms that are trading below book value to outline capital improvement plans. Dai-Ichi Life Holdings Inc. shares jumped on Monday after it announced plans to repurchase as much as 120 billion yen ($882 million) of its stock. Mitsubishi Corp. said on May 9 that it expects to buy back up to $2.2 billion.
Read: Man Group Shares Buffett’s Renewed Optimism for Japanese Stocks
Expectations on such structural changes as well as solid fundamentals are helping “justify a bullish stance” on the nation’s equities, Goldman Sachs strategists Kazunori Tatebe and Bruce Kirk wrote in a note. The outlook for the world’s third-largest economy is strong given positive factors including an inbound tourism recovery, plans for robust capital expenditure and ongoing easing by the Bank of Japan, they wrote.
To be sure, the Topix index is still about 26% below its 1989 record at the height of Japan’s bubble economy. Despite the gauge’s outperformance, when and if it will reclaim that level remains in doubt. Fundamental changes in the economy over the past decades including a population decline and maturing industries suggest the days of inflated asset prices are gone.
Still, earnings and cheap valuations are in bulls’ favor, as well as a persistently dovish stance by the BOJ. Positioning in Japanese equities have also been light, which means there’s room for more gains, Keita Matsumoto, head of financial institutions sales and solutions at Citigroup Global Markets Japan Inc. said last month.
“We believe Japanese stocks still have further to go,” Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, said on Bloomberg Television. “Companies in Japan were improving their balance sheets and were giving back to shareholders in terms of buybacks and dividends.”
Options trading implies the rally may have legs. The put-to-call ratio on the Nikkei 225 Stock Average has trended lower even as the index has climbed more than 14% this year, indicating rising bullishness despite technical signals the advance is getting overheated.
“The outperformance of Japan versus Europe and US has been happening and that will continue as long as the BOJ doesn’t change. I think that’s a key criteria,” said Alexandre Tavazzi, head of CIO office and macro research at Pictet Wealth Management.
–With assistance from Ishika Mookerjee.
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