Warren Buffett, Wall Street banks help fuel $518 billion rally in Japan shares as recession fears haunt US

Man GLG, JP Morgan Asset Management and Morgan Stanley are among those looking for more upside after Japan’s Topix index hit its highest since 1990 this week. Equities are shooting above levels dubbed the “iron coffin lid” as a return to inflation, improving shareholder returns and an endorsement by Warren Buffett all appeal to the world’s third-largest stock market. Let’s combine to burn.

“Japan is my favorite global stock market right now. It’s got everything it could wish for,” said Jack Ablin, chief investment officer at Cresett Capital Management, a Chicago-based investment advisory firm that manages about $60 billion. “We are approximately 50% overweight Japanese stocks in our developed markets strategy.”

Japan stands amid concerns in the US over the debt-limit issue and a possible recession, and China’s uneven economic recovery and its weak market form increasingly frustrate global investors. Foreign funds have further raised their holdings in Japan’s shares this month, the most since April 2017 to 2.2 trillion yen ($15.9 billion) in April.

The Topix index closed at 2,161.69 on Friday, extending its May gain to 3.8% in dollar terms. The Nikkei 225 has jumped more than 5% and ended Friday at its highest level in nearly 33 years. Meanwhile, China’s CSI 300 index has fallen nearly 3.5%, continuing to lose ground after the initial reopening rally evaporated. The S&P 500 added less than 1%.

Jeffrey Atherton, head of Japanese equities at Man GLG, sees a potential 10-15% upside for the market on flexible earnings, modest valuations and corporate reforms. MAN GLG is one of the investment divisions of MAN Group plc, the world’s largest publicly traded hedge fund.

“We expect Japanese interest rates to remain very low by global standards, so monetary policy should be supportive of risk assets, unlike other sectors,” he added.

Japan’s market cap has risen by about $518 billion since its Jan. 5 low, data compiled by Bloomberg show. Japan equity funds pulled in $800 million in the week ended May 10, the highest in seven weeks, while those in the US and Europe saw outflows, according to EPFR data.

All this as years of loose monetary policy eventually translated into high inflation. Consumer prices excluding fresh food rose 3.4% in April from a year earlier, indicating Japan has firmly outpaced deflation without preventing the excessive price gains that drive warrant rate hikes like the US. . On the other hand, China faces deflationary risks.

After sitting on piles of cash for a long time, Japanese companies are also coming to terms with the need to improve shareholder returns and reconcile cross-sharingholdings in response to a growing demand for better corporate governance.

Share buybacks hit records in fiscal 2022, with investors expected to raise valuations for firms trading at a book value ratio of below one following a call by the Tokyo Stock Exchange in January.

“We are starting to see the interests of all shareholders being recognized,” said Alex Stanick, head of global equities at Artemis Investment Management. “A lot of Japanese companies have been trading at a discount to their book value for a very long time. That makes for great bargains for investors.”

Warren Buffett helped fuel recent optimism towards Japan by renewing his support for the market during a visit earlier this year. Societe Generale SA and Pictet Wealth Management are among those with overweight Japan and underweight US equities.

Despite the major optimism, the market may still face downsides in the near term as technical indicators show the indices are in overbought territory. Real wages are falling even as inflation rises, and a slowdown in the global economy could have an impact on local exporters dependent on the US and Chinese markets.

Analysts expect Japan’s economy to grow about 1% this year below the 10-year average. The US and China are projected to expand below their historical trends, at 1.1% and 5.7%, respectively.

“The Japanese economy’s exit from deflation” and the “transformation into an economy with moderate inflation” are among the unique structural changes in Japan, JPMorgan equity strategists including Rei Nishihara wrote in a note on Friday, adding that the rally is likely to be sustainable. is likely, given that these factors are not temporary.

For many investors, it’s Japan’s valuation that’s too cheap to ignore. Nearly half the TSE Prime Market Index members are trading below the book, compared to only 5% of the S&P 500 index, data compiled by Bloomberg show. Even after the rally, Topix’s price-to-book ratio is roughly 1.3x, in line with its 10-year average.

“Despite the strong year-to-date performance, most sectors are still at a large discount to the S&P, which makes valuations attractive,” said Evgenia Molotova, senior investment manager at Pictet Asset Management in London. “We believe Japan will continue to demonstrate strong performance over the medium term.”

With the help of Hideyuki Sano and Sagarika Jaisinghani.