Investor preferences in Asia’s largest stock markets are shifting, with Japan overtaking China as the favored destination for global funds.
Goldman Sachs Group Inc. reports that foreign buying of Japanese equities surpassed that of Chinese peers for the first time since 2017, marking a significant turning point. This shift is primarily due to concerns over China’s economic growth and geopolitical tensions with the West.
Notably, Japanese stocks have seen increased interest from global funds, marking a significant change from the past when investors were hesitant due to concerns about lackluster earnings growth.
Frank Benzimra, the head of Asia equity strategy at Societe Generale SA, are confident in Japan’s outperformance over China.
“There were two main policy events in Asia in the last week of July, the BOJ meeting and the Politburo meeting, none of which change our view of Japan equities outperforming China,” said Frank Benzimra, head of Asia equity strategy at Societe Generale SA.
“The reason is that we get increasing signs that the monetary policy normalization in Japan is going to be extremely gradual, which means the yen is not rapidly re-appreciating.”
Various funds, including Allianz Oriental Income, have reallocated their holdings, giving more weight to Japanese equities than Chinese ones.
This trend underscores the growing recognition of Japan’s market potential to deliver favorable returns. The MSCI Inc. gauge of Japan stocks has already surged by 21% in 2023, benefiting from corporate governance reforms and an endorsement from renowned investor Warren Buffett.
Japan’s position as the third-largest economy in the world, along with its expertise in manufacturing and automation, adds to its appeal to investors. The country’s potential to benefit from geopolitical tensions in the region and the diversification of supply chains further boost its attractiveness.
However, caution is advised as the sharp surge in Japanese stocks raises concerns about the outlook for the yen and the market’s sensitivity to global risk-off events.
The MSCI Japan gauge experienced a slight dip after reaching a 33-year high, and valuations are becoming less attractive in comparison to their Chinese counterparts.
Japan Equities Continue to Garner Enthusiasm and Investor Confidence
Despite these considerations, optimism surrounding Japan equities seems likely to prevail as investors continue to allocate their portfolios in favor of the country. For now, many investors are maintaining substantial exposure to Japan in their portfolios, expressing confidence in the market’s performance.
“We have been max weight in Japan for some time now and are happy with our current weighting,” said Joshua Crabb, head of Asia Pacific equities at Robeco Hong Kong Ltd. His portfolio has more than 40% exposure to Japan and 16% to China.
In Taiwan, there is also enthusiasm for Japanese equities, leading to the launch of Taiwan’s largest Japan stock fund by Yuanta Securities Investment Trust Co.
Rie Nishihara, chief Japan equity strategist at JPMorgan Chase & Co., predicts that Japan’s outperformance will continue at a moderate pace, driven by evidence of ending deflation and positive economic transitions.