The Nikkei 225 (N225) is up 20% ytd, while S&P 500 grew about 10%. What’s happening? First, Buffett dumped TSMC and bought Japanese stocks amid geopolitical tension. He has significant stakes in 5 trading companies. Wall Street hedge funds visited Japan shortly after. Foreign investors kept pumping money into Japanese equity market for 6 straight weeks. Too much Chinese money pours in China-listed Japan-focused ETFs that the fund managers issued risk warnings.
So why’s the fund inflow and will this continue? We think it’s a trading opportunity in Japanese equities (through CFD) or ETF/Futures. The liquid US listed ETF on Japan is EWJ US, iShares MSCI Japan ETF, US$11b, AUM at US$61.23. It trades about 6.4m units a day.
1) Concerns over US and Europe recession are not easing. Investors are still unsure about the debt ceiling and rate hikes. Europe is also facing intensified inflation.
2) Japan has strong economic fundamentals. GDP grew 1.6% (annualized) in 1Q23. CLSA thinks Japanese GDP will outpace US and Europe. Moreover, Japan is exiting deflation and still in a monetary-easing stage.
3) The weak yen has supported the Japanese corporate sector. Even yen strengthens from BOJ policy change, demand from domestic investors for Japanese Government Bonds (“JGB”) will limit the Japanese bond yield upside.
4) Tokyo Stock Exchange’s structural reform pushed corporates to raise ROE and accelerate share buyback programs.
5) Japanese corporates are in better financial health. Japanese big caps, similar to US big tech, are net cash or even cash rich with strong future cash flow. Over half of the biggest Japanese public companies hold more cash than debt. In US and Europe, the percentage is less than 20%.
Source: FactSet, CLSA, FT
JPM and SocGen think the outperformance could sustain.
But be careful, risks you may need to consider:
1) 2H23 correction as global recession hits. JPM thinks N225 could bottom near 27,000 vs current level of 30,958.
2) A bad yen appreciation as in 2008.