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Tuesday April 16, 2024

At last, FOMO puts Japan’s stocks back on global wishlist

With Nikkei, opens new tab up 50% in just over year, however, global managers are now feeling pain of missing out and scrambling to get in

By News Desk
February 23, 2024
A stock board showing the 225-issue Nikkei average in Tokyo. — AFP/File
A stock board showing the 225-issue Nikkei average in Tokyo. — AFP/File

SINGAPORE: A record high for Japanese stocks caps a long walk out of the investment wilderness as money, momentum and signs of change in corporate Japan put the market back atop global portfolios.

It has been a long time coming: more than 34 years and long enough to scar a generation of Japanese investors, who through bitter experience have been sellers into this powerful rally. With the Nikkei, opens new tab up 50 percent in just over a year, however, global managers are now feeling the pain of missing out and scrambling to get in.

Favourable valuations, buybacks and other market-friendly corporate decisions also have investors convinced there is no bubble this time around. Inflows are only getting started, say dealers and fund managers, and barely weeks into the year brokerage analysts have been revising price targets upwards.

"If I was going to put it terms of (a) baseball analogy, I think that we're still in the second inning," said Shinji Ogawa, co-head of Japan cash equities sales at J.P. Morgan in Tokyo, before the index hit the record high it made on Thursday.

"The number of incoming requests into my team are literally exponential the last few months – it's overwhelming how much demand or interest there is in Japan at the moment."

Ogawa estimates global managers would need to buy some 42 trillion yen ($280 billion) in stocks just to bring their exposure, which has dwindled over the decades, to market weight.

Global ex-U.S. stock funds are underweight Japan to the tune of 4 percent, according to data provider EPFR. Pacific regional funds are underweight Japan by 8 percent as of December 2023.

Flows suggest managers are narrowing that quickly as staying away gets harder to justify. Net foreign buying was 6.3 trillion yen ($42 billion) last year, the most on records stretching back a decade. In January, it was 1.2 trillion yen.

"We've really seen people start to do the work on active managers in Japan," said Jamie Halse, who runs Platinum Asset Management's A$450 million ($300 million) Japan fund from Sydney and has seen A$30 million flow in over the last six months.

"In the past they may not have wanted to meet with a Japan fund manager," he said. "I think there's clear scope for more money to come in ... particularly now as it becomes the pain trade for global allocators."

BULLISH

The Nikkei's milestone recalls the collapse that followed the previous peak, when Japan's "bubble economy" burst and the index dropped 60 percent in 2-1/2 years. It also puts the lie to the myth that Japanese stocks are historic laggards.

On Thursday, the benchmark climbed as high as 39,156.97 in afternoon trade, topping its 1989 peak before logging a record closing high of 39,098.68. The recent surge is the latest in a strong run: over the past decade, the Nikkei is up 161 percent in yen terms and nearly 80 percent in dollar terms.

By comparison, over the same period, in dollars, the best performing major market in Europe, Germany's DAX, opens new tab, rose less than 40 percent. The Shanghai Composite climbed 18 percent in dollar terms in the 10 years to Feb. 2024. The S&P 500 is up about 170 percent.

Investors with long memories also point out differences in valuation and mindset this time.

In the late 1980s, Japanese stocks traded on price-to-earnings multiples in the 50s and beyond.

Now the Nikkei trades at a P/E ratio of 22 and the entire market capitalisation of the index - 680 trillion yen - is less than that of just Apple and Nvidia combined.

"The whole rally over the past decade has been driven by earnings," said Shuntaro Takeuchi, who manages Japan strategies with about $800 million in assets at Matthews Asia.

"It's not the (Bank of Japan) pumping it up, or Japanese pension funds ... the all-time high this time is driven by (earnings) growth and increased corporate governance, leading to better shareholder returns."

Last year Japanese retail investors sold net 3.5 trillion yen in stocks and they sold another trillion in January, exchange data shows. Japanese institutional investors sold 2.7 trillion in stocks in 2023 and 1.3 trillion in January.

FIFTY THOUSAND

Cash is streaming in to banks and index titans such as Toyota. Sales at Toyota, the world's top automaker, hit a record in 2023 and investors see earnings improvements continuing, even if the yen rises. Factory surveys point to an improvement in profits ahead.

Simultaneously, the Tokyo Stock Exchange is prodding firms to improve lazy capital management, unwind inefficient cross-holdings and put cash to work or return it.

Total buybacks hit a record of almost $60 billion last year, according to LSEG data. But that's lower than Apple's stock repurchases and, with some 343 trillion yen in cash on non-bank balance sheets, investors expect they'll be given a cut.

"With more than half of Japanese stocks still trading with net cash, we anticipate a rise in buyback announcements," said Wei Li, a portfolio manager at BNP Paribas Asset Management in Hong Kong.

Japan's stock dividend yield today is about 2 percent and seen rising, well up from 1989 when it was around 0.4% and the government bond yielded almost 6 percent.

To be sure, there are risks. Japan slipped into recession last quarter and the prospect of the first interest rates rise in decades and a wobbling Chinese economy also weigh.

But foreign buying, a lack of froth and a gradual shift in the global attitude toward Japan is promising, say veterans.

"Japanese stocks today ... are tremendously undervalued," said Ryoji Musha a veteran of Daiwa and Deutsche who turned sceptical in the late 1980s when valuations went sky high.

"The interest rate is 0.8 percent, compared to a stock return of 7 percent," he said, before the record high was hit, from the offices of his firm, Musha Research, overlooking Tokyo Bay.

"The Nikkei average could rise to about 50,000 yen by the end of the year."