After Japanese stocks reached an all-time high overnight for the first time since December 1989, investment managers weigh in on investment opportunities in the country. For several months, wealth firms have told this publication about their optimistic views on Japan.

The Nikkei 225, Japan’s benchmark stock index, jumped 2 per cent on Thursday, reaching 39,029, beating its record high set in 1989. Naturally, such a result has prompted commentary on how much further the market can go. 

Despite the recent strong returns, Jeremy Osborne, head of Japan equity investment directing at Fidelity International, thinks Japanese equities still offer compelling value and investors are underexposed to the market.

The performance of Japanese equities since last year has been supported by several factors. Chief among them are the country’s shift towards moderate inflation, corporate governance reforms enacted by the Tokyo Stock Exchange (TSE), the Bank of Japan’s accommodative policy stance and accompanying weakness in the yen, and renewed buying among overseas investors. There is also a sense that investors are favouring Japan for its relative stability compared with other markets, which has contributed to the direction of flows, he said in a note.

Osborne thinks Japanese stocks are not excessively priced, and both overseas and domestic investors remain underinvested in Japanese stocks.

He is not alone in his views. “Fifteen years of restructuring has improved corporate cashflow and margins resulting in higher shareholder returns. The process has further to run, and valuations are still cheap,” Rupert Kimber, portfolio manager at the Geneva-based asset management company Quaero Capital, told this news service yesterday.

James Salter, founder of Zennor Asset Management, believes that things are really different this time. “The index is just one of several indicators that suggest Japan’s investment landscape has turned the corner. Structural reforms, changing dynamics, and a corporate governance revolution with a new focus on improved returns on capital unique to Japan are starting to take hold,” Salter said.

Mark Haefele, chief investment officer at UBS Global Wealth Management, also highlighted how Japan has been one of the best-performing markets this year, amid positive sentiment in the US and a weaker yen. “We are neutral on Japan within our global portfolios, but we see several supportive catalysts for the market over the next six months. We continue to prefer large-cap banks and real estate within Japanese equities, and see opportunities in high dividend and laggard cyclical stocks,” Haefele said.

Osborne believes that the biggest risk to Japan’s equity market is a return to deflation, but he thinks the chances of this are low. “There are risks around inflation and how rising interest rates can impact market valuations, but the likelihood is that in Japan any increase in rates will be gradual,” he said.

Other wealth managers are also positive about Japanese equities in 2024. German asset manager DWS' top pick for Asia is Japan, both from a valuation perspective and in terms of earnings' growth, and it believes that Japanese equities are a good way of benefiting from China's growth opportunities. Joost van Leenders, senior investment strategist at Netherlands-headquartered wealth manager Van Lanschot Kempen, has expanded his overweight position in Japan. “Monetary policy continues to be extremely expansionary in Japan. Corporate earnings' growth has recently been stronger there than in the US and Europe,” van Leenders said. See more commentary here and here.

Nigel Green, CEO of the deVere Group, an IFA, said a key driver of Japan’s stock market resurgence lies in the robust corporate earnings reported by major companies. 

“Banking, electronics, and consumer stocks, in particular, have displayed stellar financial performances, instilling confidence in investors. The corporate sector’s ability to weather economic challenges and deliver strong earnings signals resilience and adaptability,” Green said in a note. “Regulatory reforms aimed at streamlining procedures, reducing bureaucracy, and enhancing transparency are also instilling confidence in foreign investors."

“The combination of robust corporate earnings, investor-friendly measures, a weaker yen, and a commitment to improved corporate governance creates a compelling narrative for those considering investments in Japan,” Green said. â€śIt seems that 2024 is set to be the year that global investors, recognising the unique and lucrative prospects offered by its resurgent stock market, rediscover and pile back into Japanese equities.”