Analysis: Soaring Japanese equities offer investors cozy distance from troubled China

YASKAWA Electric

27/02/2024 02:00

By Brigid Riley
       TOKYO, Feb 27 (Reuters) - As economic and geopolitical
woes spur an exodus of investors from China, many have been
redirecting money into Japan, giving the benchmark Nikkei
 .N225  an extra boost as it rockets to all-time highs.
    While some investors just want to say goodbye to Japan's
troubled neighbour in embracing the land of the rising sun,
paradoxically, those seeking to harness the two countries' close
economic ties at a cozy distance are winning handsomely.
    Nikkei heavyweights with a significant presence in China,
such as chip giant Tokyo Electron  8035.T  and Uniqlo parent
company Fast Retailing  9983.T  are soaring, having gained 126%
and 63%, respectively, over the last 12 months.
    ASICS Corp  7936.T , which has subsidiaries in countries
including China, is up about 91%, while Japanese restaurant
chain Seizeriya  7581.T , a popular chain that has made a mark
in China, has climbed 62%.
    Investors who have historically owned Chinese stocks but are
now keeping a distance for fear of U.S. sanctions say owning a
Japanese firm that either sells to China or is based there is
becoming the more politically palatable option. 
    Others are betting on China's eventual recovery, either
driven by its quest for self-sufficiency or improved spending by
its 1.4 billion consumers.
    Buying Japanese stocks is "less controversial in the U.S.
political environment right now", said Liqian Ren, director of
Modern Alpha at WisdomTree Asset Management in Philadelphia.  
    "If a client owns Japan, even though the exposure is China's
kind of proxy, your client is much less likely to ask you a
political question if the portfolio didn't perform as well," she
said.
    Japan's largest trade partner, China accounts for a fifth of
trade and is also the third largest destination for Japanese
investment, after the United States and Australia.
    While the countries may be intertwined economically, their
financial markets could not present a greater contrast.
    China's blue-chip CSI300 index  .CSI300  hit five-year lows
this month, and is down 18% in about a year, pummeled by
property market troubles and a lack of large-scale stimulus.
    Japanese equities  .N225 , on the other hand, are at record
highs, and seem set to rise on the back of a brighter outlook
for its economy and corporate governance reforms. 
    About $6.59 billion has flowed out of China offshore funds
since April 2023, while Japanese offshore funds received $6.3
billion worth of inflows last month, adding to inflows of $7.84
billion last year, according to LSEG data.
    Jamie Halse, a portfolio manager at Platinum Asset
Management in Sydney, owns baby products maker Pigeon Corp
 7956.T .
    The firm draws the majority of its operating profit from
China, and Halse pointed to a rebound in the number of marriages
 on the mainland last year, which jumped 10%, following steady
declines during the COVID-19 pandemic.
    "The other major area is most of the semiconductor supply
chain, which is heavily exposed to Chinese demand," Halse added.
"It has been very robust recently."
    Japan's chip-sector giants have helped to fuel the Nikkei's
17% gains this year, with Tokyo Electron and chip-testing
equipment maker Advantest  6857.T  ranking among top performers.
    "We are seeing a lot of flows in our hedge fund book
globally coming out of China, and ... a lot is coming into the
Japanese market," said Bruce Kirk, chief Japan equity strategist
at Goldman Sachs.    
    Chinese ties can serve as a major buoy or bludgeon to
Japanese companies. The earnings of Shiseido  4911.T , a
cosmetic firm banking on China's beauty market, were battered by
the slowing economy and its shares have fallen 32% in a year.
    Whether investors come to Japan seeking China proxies or 
complete disconnection, the shadows cast over China have given
the Nikkei an undeniable boost.
    Even companies with slim links to China, such as Recruit
Holdings  6098.T  and Toyota Motor  7203.T , are up sharply.
    But in the end, analysts see fundamentals such as corporate
governance reforms and earnings at index heavyweights as key to
future inflows.
    "The China replacement trade is like extra icing on the
top," said WisdomTree's Ren.

 (Reporting by Brigid Riley; additional reporting by Tom
Westbrook, Vidya Ranganathan and Rae Wee in Singapore; 
Editing by Vidya Ranganathan and Clarence Fernandez)
 ((brigid.riley@thomsonreuters.com;))