The recent surge in Japanese equities hasn’t dented their appeal for investors as they see the market rallying further on the back of still-attractive valuations, broadening structural trends and untapped investment pockets.
Earnings, buoyed by Japan’s improving corporate governance, and macro fundamentals continue to drive optimism, investors said, even as the Nikkei rallied to a record high in March.
The price-to-earnings (P/E) ratio for the Japanese market is just above the 15-year average, Michiko Sakai, portfolio manager and country specialist for Japan equities at JPMorgan Asset Management told the Reuters Global Markets Forum.
“So, it’s very difficult to say it’s priced in,” she said.
The Nikkei is trading at a one-year forward P/E of 20.4, below its historical 22.34, LSEG data showed. The index has already risen 13.4% year-to-date, after recording a 28% surge in 2023.
Japan is the “go-to market” in Asia, Bank of America’s latest fund manager survey showed, with most respondents expecting positive returns from the world’s fourth-largest economy over the next 12 months.
Signs that Japan may be ending its decades-long deflation period marks a big turning point, Sakai said, underscoring the importance of ‘bottom-up’ investing. She sees Japanese automation, healthcare, insurance and auto sectors as promising opportunities for growth.
“We are going through what I call the ‘young love’ stage of Japan’s rebirth,” said Richard Kaye, portfolio manager at Comgest, which manages $4.3 billion under its Japanese funds.
A significant shift is underway in Japan, as domestic investors are now returning to the market, he said.
Kaye said his investment strategy focuses on companies with unique technology, exposure to Asia and domestic change stories, as those are backed by long-term sustainability.
Claire Huang, senior emerging markets strategist at Amundi Investment Institute, expected the rally, that has so far been driven by mega export-oriented names, to broaden out to value stocks, small and mid-cap firms, as well as domestic business-oriented companies.
Structural challenges persist, Huang said, adding: “Japan has one of the oldest populations in the world, it has chronic demand deficiency.”
That is the reason for the Bank of Japan (BOJ) to keep accommodative financial conditions for longer, she said.
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