Foreign Investors Eye Japanese Stocks Again After Market Plunge
Friday, Aug 16, 2024 1:00 am ET
Goldman Sachs' chief Japan equity strategist, Bruce Kirk, asserts that following the largest drop since Black Monday in 1987, foreign investors are poised to start purchasing Japanese stocks again as the market stabilizes.
“We were very concerned that the scale of the correction might deter foreign investors temporarily, but that doesn’t seem to be happening at this stage,” said Kirk. “If anything, I think the level of interest among some groups of foreign investors has noticeably increased.”
Kirk, who has been monitoring the Japanese stock market since 2001, advises investors to take advantage of last week's market pullback for buying opportunities. He attributes the recent market drop to technical factors rather than underlying fundamentals, distinguishing it from crises like the 2008 global financial meltdown or the 2011 Fukushima nuclear disaster, which involved systemic risks. Last week's fall from July's all-time high by more than 20% has seen signs of overseas demand in the past few days.
Sentiment improvement will cast a vote of confidence in Japanese equities. Japanese stocks are still down about 6% since the end of July, dragged lower by the Bank of Japan’s interest rate hike and its announced reduction in bond purchasing, which sent the yen soaring.
Before the Bank of Japan's decision, foreign investors had been net sellers of Japanese stocks for three consecutive weeks.
The exodus of overseas funds from Japanese equities can partially be explained by the concentration of investments in a few prominent companies, Kirk explained.
Approximately 280 Japanese stocks have an average daily trading volume exceeding $20 million. Of these, around 50 stocks are well-understood by foreign investors and have significant foreign ownership. “A lot of people managing funds in Japan have very tight risk limits, and when these limits come under pressure, it often triggers a surge in selling,” said Kirk.
According to financial reports up to March, the three largest-weighted stocks in the TOPIX index—Toyota Motor Corporation, Mitsubishi UFJ Financial Group, and Sony Group Corporation—all have foreign ownership ratios of at least 20%.
Goldman Sachs has adjusted its year-end target for the TOPIX index from 2,850 points to 2,700 points due to short-term negative impacts from the market correction, but maintains its 12-month target at 2,900 points. The index closed at 2,600.75 on Thursday.
The firm also raised its investment ratings for Japan’s food, transportation, logistics, and pharmaceutical sectors, recommending a reduction in cyclical industry exposure while increasing positions in companies reliant on domestic demand.
“I don't think we are out of the woods yet,” Kirk said. “It may be a more defensive way to manage portfolios by focusing on domestic demand drivers rather than global and cyclical factors.”
However, he added that the stability of the yen should reassure investors who are investing in Japanese equities with dollar-denominated funds. He noted that the current level of the yen is unlikely to pose risks to corporate earnings or forecasts.
Kirk also emphasized that the upbeat first-quarter earnings and upward guidance revision of Japanese companies is another cause for optimism. He added that an upcoming corporate governance report from the Tokyo Stock Exchange later this month could further influence market trends.
“We were very concerned that the scale of the correction might deter foreign investors temporarily, but that doesn’t seem to be happening at this stage,” said Kirk. “If anything, I think the level of interest among some groups of foreign investors has noticeably increased.”
Kirk, who has been monitoring the Japanese stock market since 2001, advises investors to take advantage of last week's market pullback for buying opportunities. He attributes the recent market drop to technical factors rather than underlying fundamentals, distinguishing it from crises like the 2008 global financial meltdown or the 2011 Fukushima nuclear disaster, which involved systemic risks. Last week's fall from July's all-time high by more than 20% has seen signs of overseas demand in the past few days.
Sentiment improvement will cast a vote of confidence in Japanese equities. Japanese stocks are still down about 6% since the end of July, dragged lower by the Bank of Japan’s interest rate hike and its announced reduction in bond purchasing, which sent the yen soaring.
Before the Bank of Japan's decision, foreign investors had been net sellers of Japanese stocks for three consecutive weeks.
The exodus of overseas funds from Japanese equities can partially be explained by the concentration of investments in a few prominent companies, Kirk explained.
Approximately 280 Japanese stocks have an average daily trading volume exceeding $20 million. Of these, around 50 stocks are well-understood by foreign investors and have significant foreign ownership. “A lot of people managing funds in Japan have very tight risk limits, and when these limits come under pressure, it often triggers a surge in selling,” said Kirk.
According to financial reports up to March, the three largest-weighted stocks in the TOPIX index—Toyota Motor Corporation, Mitsubishi UFJ Financial Group, and Sony Group Corporation—all have foreign ownership ratios of at least 20%.
Goldman Sachs has adjusted its year-end target for the TOPIX index from 2,850 points to 2,700 points due to short-term negative impacts from the market correction, but maintains its 12-month target at 2,900 points. The index closed at 2,600.75 on Thursday.
The firm also raised its investment ratings for Japan’s food, transportation, logistics, and pharmaceutical sectors, recommending a reduction in cyclical industry exposure while increasing positions in companies reliant on domestic demand.
“I don't think we are out of the woods yet,” Kirk said. “It may be a more defensive way to manage portfolios by focusing on domestic demand drivers rather than global and cyclical factors.”
However, he added that the stability of the yen should reassure investors who are investing in Japanese equities with dollar-denominated funds. He noted that the current level of the yen is unlikely to pose risks to corporate earnings or forecasts.
Kirk also emphasized that the upbeat first-quarter earnings and upward guidance revision of Japanese companies is another cause for optimism. He added that an upcoming corporate governance report from the Tokyo Stock Exchange later this month could further influence market trends.