Analysis: Japanese stocks, long shunned, attract billions of foreign dollars

POLA ORBIS HOLDINGS

01/11/2017 18:58

By Trevor Hunnicutt and Hideyuki Sano 
    NEW YORK/TOKYO, Nov 1 (Reuters) - Japan is shaking off 
currency gains that typically punish its stocks, enticing 
foreign investors including Goldman Sachs Group Inc  GS.N  and 
BlackRock Inc  BLK.N , which are pumping billions of dollars 
into the country's equities. 
    The Nikkei index  .N225  rose to its highest levels since 
1996 despite the yen's near-3 percent gain, returning 17 percent 
this year, or 20 percent in U.S. dollar terms, including 
dividends. Typically, a stronger yen hurts stocks in the export 
powerhouse. 
    Foreign investors, who largely shunned Japanese stocks on 
doubts rising corporate earnings would be sustained, bought 4.4 
trillion yen ($39 billion) of Japanese stocks and futures during 
the past six weeks, according to the Tokyo Stock Exchange. 
Foreign investors sold 2.4 trillion yen ($21 billion) from 
mid-July to early September at the height of fears over a 
confrontation with North Korea. 
    Yet the market still looks attractive to foreign investors  
as strong domestic demand has helped drive Japanese gross 
domestic product to an annualized 2.5 percent in the second 
quarter, its sixth straight quarter of expansion.  urn:newsml:reuters.com:*:nL4N1LM2EN 
    "It's probably the cheapest developed market out there - 
maybe the only cheap developed market out there," said Russ 
Koesterich, a manager of the $39 billion BlackRock Global 
Allocation Fund  MALOX.O , which raised its Japanese stock 
exposure in recent months. At the end of September, Global 
Allocation held 8.6 percent of its assets in Japanese equities, 
up from 7.8 percent the month prior, according to disclosures on 
the fund's website. 
    The ratio of stock prices to earnings expected over the next 
12 months is 18.6 in the United States, compared to 15.4 in 
Japan, Thomson Reuters data shows. 
    There are good reasons for the discount, including  
stubbornly low inflation, a heavy debt load and an aging 
population, said Koesterich. 
    The Bank of Japan (BOJ) aggressively tried to jumpstart its 
economy over the last several years, buying domestic stock 
exchange-traded funds (ETF) at a pace of 6 trillion yen ($53 
billion) per year. On Tuesday BOJ Governor Haruhiko Kuroda 
signaled the chance of slowing ETF buying before embarking on a 
full-fledged withdrawal of stimulus.  urn:newsml:reuters.com:*:nL4N1N601H 
    The market is dodging that risk for now. This year Japanese 
stocks have become statistically less likely to sell off when 
the yen rises, but they still gain when the yen weakens, 
according to an analysis by brokerage firm Macro Risk Advisors 
LLC. 
    "Exports are becoming less influenced by the yen," said 
Hiroshi Watanabe, economist at Sony Financial Holdings Inc 
 8729.T . "At the moment, there is a strong demand for digital 
products and many Japanese products are competitive in quality 
and performance rather than in price." 
    Japan's exports rose at the fastest pace in nearly four 
years in August. The pace decelerated in September, though 
economists regard the slowdown as temporary. Meanwhile, Japan's 
retail sales rose in September at the fastest pace in three 
months.  urn:newsml:reuters.com:*:nL4N1MS1TC  urn:newsml:reuters.com:*:nL4N1M117H  urn:newsml:reuters.com:*:nL4N1N22PY 
    David Rosenberg, Gluskin Sheff + Associates Inc's  GS.TO  
chief economist, said in a note that "a 25-year secular 
downtrend has recently been broken" in Japan. He argued the 
disconnect between stocks and the yen is confirmation that the 
market is trading on corporate fundamentals rather than currency 
speculation, with a fall in unemployment and rising domestic 
demand aiding small-cap companies. 
    However, corporate governance remains a concern to some 
investors following major scandals. Kobe Steel Ltd  5406.T , 
Japan's third-largest steelmaker, earlier this month said data 
on the quality of some of its products was fabricated. 
 urn:newsml:reuters.com:*:nL4N1N51HO 
    Katie Koch, Global Head of Client Portfolio Management and 
Business Strategy at Goldman Sachs Asset Management, said the 
Japanese economy nonetheless may be developing competitive 
advantages and that corporate reforms on issues like executive 
compensation are becoming more widespread. 
    The fund manager's Japan-focused holdings include Nidec Corp 
 6594.T , which has gained 55 percent this year, and Pola Orbis 
Holdings Inc  4927.T , up 52 percent. 
    Nidec makes small motors that power electric vehicles, a 
growing market, while Pola Orbis' cosmetics draw consumers from 
China's expanding middle class. 
    Automation is attracting other investors into Japanese 
markets. Two U.S.-listed robotics ETFs - Global X Robotics & 
Artificial Intelligence ETF  BOTZ.O  and ROBO Global Robotics 
and Automation Index ETF  ROBO.O  - are heavily invested in 
Japanese stocks, such as Fanuc Corp  6954.T . 
    That manufacturer helps factories automate production and is 
up more than 38 percent this year, while the two robotics ETFs 
have pulled in $2.1 billion, according to Thomson Reuters' 
Lipper research unit. 
 
 (Reporting by Trevor Hunnicutt in New York and Hideyuki Sano in 
Tokyo; Editing by Jennifer Ablan and Diane Craft) 
 ((trevor.hunnicutt@tr.com; +1 646 223 7914;)) 
 
Keywords: GLOBAL STOCKS/JAPAN USA