Stocks in Japan are primed to outpace global peers this year as improving corporate-governance standards and the central bank’s potential policy normalization burnish the nation’s appeal for foreign funds, according to Man GLG.
Warren Buffett’s most recent endorsement of the market and the end of global rate hikes are also positive catalysts, according to Jeffrey Atherton, head of Japanese equities at UK-based Man GLG, a unit of hedge fund Man Group Plc.
“Medium term we are very optimistic,” Atherton said in an interview last week. “It does seem that the pace of change in Japan is accelerating.”
Atherton is lead manager of the Man GLG Japan CoreAlpha Equity fund, which has returned 18% over the past year, beating 94% of its peers, according to data compiled by Bloomberg. He and his co-managers Adrian Edwards, Stephen Harget and Emily Badger were ranked the equal second best money managers in Japan by Citywire in February, based on average total returns over the previous 12 months.
The Tokyo Stock Exchange triggered a rally in a number of Japanese stocks in February by saying it would ask companies trading below their book value to come up with capital improvement plans starting in spring. Buffett, a known value investor, added to the optimism this month when he said he had raised his holdings of Japanese equities.
“Many investors are still not aware of the corporate governance movement and see Japan as a global cyclical market,” Atherton said. “The news of Buffett’s investment has an effect on sentiment, but also hopefully an effect on foreign money actually coming into Japan, which hasn’t happened for many years.”
The broad-based Topix index of Japanese shares has rallied 7.4% over the past 12 months, while the MSCI All-Country World Index has fallen 5.5%. The outperformance has been shrinking however, with the MSCI gauge slightly beating the Topix this year.
Looking ahead, Atherton said two of the main things to watch will be corporate earnings and the next two BOJ decisions for any further signs of policy normalization.
“There’s a high chance that the BOJ tells us what it’s going to do by the end of June, and the next three months could actually set the stage for the second half of the year,” he said.
The top holdings of Atherton’s fund include Panasonic Holdings Corp., Sumitomo Mitsui Financial Group Inc. and Mitsubishi Estate Co., according to data compiled by Bloomberg.
Atherton said he favors “unloved” domestic-focused stocks, including those in the retail, real estate and construction sectors.
The government and the BOJ’s push to keep inflation stable at around 2%, the country’s reopening after Covid, and the stronger purchasing power due to excess savings during the pandemic are all likely to drive spending and the top lines of corporates, he said.
“We’re slightly less positive about financials,” Atherton said, adding that the collapse of Silicon Valley Bank “showed what could happen when a bank goes wrong.” At the same time, insurers are better placed as they as not as exposed to liquidity issues when Japanese interest rates potentially rise, he said.
Even after their rally over the past year, the main Japanese stock indexes are still well below their historical peaks. The Nikkei 225 Stock Average is currently around 26,650, after closing at as high as 38,915.87 in December 1989 before the collapse of what become known as the “bubble economy.”
“The current market is still lower than where I started,” said Atherton, who has more than three decades of experience as a manager of Japanese equities. “I’m very hopeful that Japan will have a run and go through that 39,000 level at some point in the not too distant future, hopefully before I retire,” he said.