Foreign traders buying most since Abenomics in a Suga-free Japan

‘We have become more bullish’ – equity strategist.
Image: Akio Kon, Bloomberg
Foreign investors are set to buy the most Japanese stocks since the heyday of Abenomics after Prime Minister Yoshihide Suga’s shock resignation put Japan back in the headlines.
Fund managers and strategists from JPMorgan Securities Japan Co., Baillie Gifford & Co. and BNP Paribas Asset Management are among a string of investors who say they’re becoming more positive on Japan as markets gear up to learn who will be the next prime minister.

“We have become more bullish,” Ryota Sakagami, chief Japan equity strategist at JPMorgan Securities, wrote in a note. Foreign investors have been “substantially underweight on Japan and primed for significant buying.”

In a market where foreigners account for two-thirds of stock trading, a switch in overseas sentiment could change the dynamic. Japanese equities have lagged developed peers for most of this year.

A new administration brings the prospects of a spending boost or reforms to vested interests, and foreign investors are back at the table, buying 363.6 billion yen ($3.3 billion) of equities on the Tokyo Stock Exchange’s First Section in the week through Sept. 3.

That’s put 2021 on course to be the best year of buying of cash equities by foreign investors since 2013, when foreign interest surged in former Prime Minister Shinzo Abe’s Abenomics program. It would also be the first year of net purchases by foreigners since 2017, data from Japan Exchange Group show.

The Topix index soared to its highest since 1990 after Suga said he’s departing.

His resignation is “helping the case for Japanese equities because it does take off the political uncertainty,” said Lale Akoner, senior market strategist at BNY Mellon Investment Management.

A general election due in autumn that had been seen a risk with Suga atop the party could now give a boost to equities.

For some, the political winds only underline their choice to go long on Japan. BNP Paribas Asset was already overweight Japan in its multi-asset portfolios, chief market strategist Daniel Morris said. “The recent changes on the political front further support that allocation,” he added.

As vaccination rates reach parity with the U.S. and Europe, an economic re-opening is also among reasons to be positive, investors say, along with an earnings rebound. Those factors will now be backed by policy support from a strong ruling party.

For Praveen Kumar, a fund manager at Baillie Gifford & Co. in Edinburgh, valuations for Japan equities remain quite cheap relative to global peers.

The Topix trades at 15 times forward earnings, versus the S&P 500’s 22 times. He sees “lots of things to like about Japan” including the absence of Chinese-style regulatory overreach and the involvement of the country’s firms in the global supply chain for sectors such as automation.

Japan could see more than 3 trillion yen of net buying in stocks and futures, according to Toru Ibayashi, the head of Japanese equities research at UBS SuMi Trust Wealth Management. He likens cyclical foreign investment in and out of Japan to the movements of waves on the ocean.

“Now, the tide is coming in,” he said.

© 2021 Bloomberg L.P.

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