Analysis: Japanese stocks, long shunned, attract billions of foreign dollars
01/11/2017 23:00
(Repeats story that ran earlier with no change to headline or
text)
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