(Bloomberg) – Some of the world’s most famous investors and Wall Street’s biggest banks express a near consensus that the Japanese stock market is the place to be while its big peers – the United States and China – are grappling with growing economic headwinds.
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Man GLG, JPMorgan Asset Management and Morgan Stanley are among those seeing more upside after Japan’s Topix index hit its highest level since 1990 this week. Stocks surge above levels dubbed the ‘iron coffin lid’ as the return of inflation, improving shareholder returns and the endorsement of Warren Buffett combine to bolster the appeal of the world’s third-largest stock market. world.
“Japan is my favorite global stock market at this point. It gets everything it wants,” said Jack Ablin, chief investment officer at Cresset Capital Management, a Chicago-based investment advisory firm that manages about $60 billion. “We are about 50% overweight Japanese equities in our developed markets strategy.”
Japan stands out amid concerns in the United States over the debt ceiling issue and a possible recession, and as China’s uneven economic recovery and its lackluster market increasingly frustrate investors global. Foreign funds further increased their holdings of Japanese stocks this month after gaining 2.2 trillion yen ($15.9 billion) in April, the most since October 2017.
The Topix index closed at 2,161.69 on Friday, taking its May gain to 3.8% in dollar terms. The Nikkei 225 rebounded more than 5% and ended Friday at its highest level in nearly 33 years. Meanwhile, China’s CSI 300 index fell around 3.5%, continuing to lose ground after the initial recovery from the reopening evaporated. The S&P 500 added less than 1%.
Jeffrey Atherton, head of Japanese equities at Man GLG, sees an additional 10-15% potential for the market thanks to resilient earnings, modest valuations and corporate reforms. Man GLG is one of the investment divisions of Man Group Plc, the world’s largest listed hedge fund.
“We expect Japanese interest rates to remain very low by global standards, so monetary policy should support risky assets, unlike other regions,” he added.
Japan’s market value has jumped about $518 billion since the Jan. 5 low, according to data compiled by Bloomberg. Japanese equity funds attracted $800 million in the week ended May 10, the most in seven weeks, while those in the United States and Europe saw outflows, according to data from the EPFR.
All of this comes as years of accommodative monetary policy are finally translating into higher inflation. Consumer prices excluding fresh food rose 3.4% from a year ago in April, showing that Japan has firmly beaten back deflation without fueling excessive price rises that justify price hikes. rate as in the United States. China, on the other hand, faces deflationary risks.
Long sitting on piles of cash, Japanese companies are also accepting the need to improve shareholder returns and untangle cross-shareholdings in response to growing demand for better corporate governance.
Share buybacks hit a record high in fiscal 2022 as investors expected more following the Tokyo Stock Exchange’s call in January to boost valuations of companies trading at a book value ratio less than one.
“We are starting to see the interests of all shareholders recognized,” said Alex Stanić, head of global equities at Artemis Investment Management. “Too many Japanese companies have been trading for too long at a discount to book value. This makes good business for investors.
Warren Buffett helped fuel recent optimism about Japan by renewing his endorsement for the market during a trip earlier this year. Societe Generale SA and Pictet Wealth Management are among those overweight Japan and underweight US equities.
Despite the prevailing optimism, the market could still face setbacks in the short term, as technical indicators show that the indices are in overbought territory. Real wages are falling even as inflation picks up, and a slowing global economy could weigh on local exporters that rely on US and Chinese markets.
Analysts expect the Japanese economy to grow about 1% this year, above the 10-year average. The United States and China, at 1.1% and 5.7% respectively, are expected to grow below their historical trends.
“Japanese economy’s exit from deflation” and “transition to a moderately inflationary economy” is one of Japan’s unique structural changes, JPMorgan equity strategists, including Rie Nishihara, wrote in a note dated Friday, adding that the rally is likely to be long-lasting, given that these factors are not temporary.
For many investors, it is Japan’s valuation that is too cheap to ignore. Almost half of the members of the TSE Prime Market Index are trading below the book, compared to just 5% of the S&P 500 Index, according to data compiled by Bloomberg. Even after the rally, the Topix’s price-to-book ratio is around 1.3x, in line with its 10-year average.
“Despite strong year-to-date performance, the majority of sectors are still heavily discounted against the S&P, making valuations attractive,” said Evgenia Molotova, chief investment officer at Pictet Asset Management in London. “We believe Japan will continue to show strong performance over the medium term.”
–With help from Hideyuki Sano and Sagarika Jaisinghani.
(Adds equity strategist commentary in penultimate paragraph.)
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