Latecomers lose out as Nikkei's 18 pct rally surprises the unwary

Keyence

18/12/2017 03:00

* Many global investors turn bullish on Japan equities 
    * Japan preferred as tactical, cyclical play 
    * Patient bulls still wait for buying opportunities 
    * Despite recent rally, upside still seen in 2018 
 
    By Tomo Uetake 
    TOKYO, Dec 18 (Reuters) - An 18 percent rally in Tokyo 
stocks since September caught some global investors badly 
under-invested in Japanese shares - and too late to cash in on 
the second best-performing major market this quarter. 
     They failed to anticipate that synchronised global economic 
growth, higher corporate earnings, and a market underpinned by 
political stability and expansionary monetary policy would drive 
growth quite as forcefully as it has.   
     Many investors are turning bullish, Reuters learned from 
interviews with 10 European and U.S. asset managers over 
November to December, but some international long-only funds 
have yet to jump on the bandwagon because popular stocks are 
already highly priced. 
     "If you look around globally, there are still many 
investors who have missed the timing to buy because it was such 
a rapid rise," said Takashi Maruyama, chief investment officer 
Japan at Fidelity International, referring to the rally that 
started in mid-September.     
     
    Goldman Sachs' data, via a sampling of 44 global equity 
funds, mostly U.S. mutuals, shows that their Japan exposure is 
4-7 percent underweight versus the MSCI EAFE index at the end of 
September.  
    "They probably have bought some shares since then, but have 
not yet reached neutral," said Kathy Matsui, vice chair and 
chief Japan strategist at Goldman Sachs Japan. 
    "While they were underweight Japan, the market rallied more 
than those in their home countries - painful for those who 
under-invested. The so-called 'pain trade' has prompted recent 
massive buying by foreigners." 
    Global investors' appetite for Japanese stocks ebbed after 
the initial excitement over the government's expansionary 
'Abenomics' policies faded in 2015 and as other markets, such as 
emerging markets and Europe, appeared to offer better 
opportunities. 
    But an uptick in the global economy in recent months has 
improved Japan Inc's earnings outlook while Prime Minister 
Shinzo Abe's election victory in October is expected to cement a 
few more years of political stability and easy monetary policy. 
    "Japan stands out as a calm area. The political backdrop 
looks a lot less certain in many other alternative equity 
markets. So I think investors will continue to like the Japanese 
market and you will continue to see flows," said Rod Paris, 
Aberdeen Standard Investments' chief investment officer. 
    Richard Kaye, portfolio manager at French asset management 
firm Comgest, said Japan can offer unique long-term 
opportunities for "patient bulls" because it is a misunderstood 
market plagued by persistent doubts. 
    "Although Japan does not offer FANGs, it does offer a host 
of quality growth companies in high-tech engineering, such as 
robotics, sensors, materials handling or semiconductors," he 
said. (FANGs is market terminology for superstar stocks such as 
Facebook, Amazon, Netflix and Google) 
    But many long-only stock pickers face a dilemma: They are 
positive on the overall Japan market but often many of the names 
they like, in cyclical sectors such as robotics and information 
technology, are too expensive.  
    Large cap robotics-related shares Fanuc  6954.T , factory 
automation firms Keyence  6861.T  and Misumi  9962.T , all trade 
at price-earnings ratios above 30, a much higher multiple than  
the benchmark Nikkei's  .N225  15.  
    The Bank of Japan's constant buying of exchange-traded funds 
has also put a floor under the stock market, supporting share 
prices but depriving active managers of opportunities to pick a 
bottom. 
    As overseas investors account for more than two thirds of 
trade on the Tokyo Stock Exchange, their participation is seen 
as a key factor in its success.  
    Valentijn van Nieuwenhuijzen, chief investment officer at 
Dutch asset manager NN Investment Partners, says many foreign 
investors now favour Japanese shares as a tactical and cyclical 
play on the global economy, rather than long-term bets on 
Corporate Japan. 
    "They are far from convinced that Japan has really turned 
the corner and is already on a reflation path. If that 
conviction rises over the next couple of years, then I think 
there is another pool of money that could flow into Japan, but 
it's too early to say," he said. 
    Foreign and domestic bulls, "patiently" looking for buying 
opportunities, are setting up the Nikkei, which currently hovers 
near 26-year highs, for a barnstorming 2018. 
    Goldman Sachs expects the Nikkei to finish 2018 at 25,200 
yen, a rise of 12 percent from current levels, while JPMorgan 
expects the Nikkei to peak at 26,000 in 2018. 
 
 
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MSCI JAPAN VS ACWI    http://reut.rs/2jVPevr 
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 (Reporting by Tomo Uetake; Editing by Eric Meijer) 
 ((tomo.uetake@thomsonreuters.com; +81 3 6441 1645; Reuters 
Messaging: tomo.uetake.thomsonreuters.com@reuters.net)) 
 
Keywords: JAPAN MARKETS/STOCKS