Good article on AFR https://www.afr.com/markets/equity-markets/fundies-are-going-big-on-japanese-stocks-here-s-what-to-know-20251015-p5n2qk
Fundies are going big on Japanese stocks.
Gus McCubbing
Major Australian investors are increasing their exposure to Japanese stocks, betting a wave of dividends, share buybacks and a push to prioritise returns will see a long-lagging share market post outsize gains.
Once the envy of the world, Japan’s largest companies have struggled to move on from a stagnant corporate culture. Some, for instance, are notorious for still using fax.
Nomura Asset Management chief strategist Hideyuki Ishiguro says the Nikkei 225 will rally further if Liberal Democratic Party leader Sanae Takaichi (pictured) becomes prime minister. AP
But a significant overhaul of regulations in 2015 and a looming technology cliff is finally pushing Japanese companies to make changes that are attracting investors.
Forager international shares fund equity analyst Isabella Foley says laggard technology systems and demographic shifts – an ageing population, shrinking workforce and rising wages – have put a premium on productivity gains. “That urgency is fuelling demand for software,” Foley said.
The fund has increased its holdings in Japanese equities to nearly 20 per cent of the portfolio, up from just 5 per cent in 2023, with all seven investments in software small-caps.
Foley’s top stock picks included OBIC Business Consultants, which she compared to the ASX-listed Xero, recruitment platform Visional, which she tipped to benefit from a growing willingness of workers to switch jobs, and eWeLL, a cloud product built for home-visit nursing, a market that is expanding as hospitals push patients into home-care.
Similarly, one of Minotaur Capital’s 10 biggest holdings is COVER Corporation, a Japanese tech company specialising in virtual YouTubers, known as “VTubers”. “The business focuses on recruiting little-known streamers, developing characters around them, and monetising them through merchandising, live concerts, and brand partnerships with names like McDonald’s in Japan,” said portfolio manager Thomas Rice.
He also likes semiconductor company MegaChips, which provides security chips for Nintendo Switch cartridges and is, according to Rice, embracing Japan’s governance reforms after announcing it would buy back ¥10 billion ($102 million) worth of shares.
A major part of Japan’s corporate overhaul – launched under former prime minister Shinzo Abe and carried out by successive governments and Tokyo’s stock exchange – has been directing companies, traditionally over-capitalised with large amounts of cash, real estate and shares on their balance sheet, to focus more on shareholder returns, as well as improved board independence, according to James Halse, co-founder of Senjin Capital and the former head of Platinum Asset Management’s Japan strategies.
Foreign money has already come flooding in – Warren Buffett helped put Japan back on the global investment map in June 2023 when his Berkshire Hathaway investment vehicle bought stakes in five major Japanese trading houses, including Mitsubishi Corp and Mitsui.
Meanwhile, overseas firms made 157 proposals to buy or acquire majority stakes in Japanese companies in the first eight months of this year, according to Bloomberg, on pace to beat last year’s record of 193.
All this has contributed to a surge in Japanese equities, with the Nikkei 225 reaching a closing high of 48,277.7 on Thursday, having risen about 25 per cent in the last 12 months, easily outperforming both the S&P500 (up 13.5 per cent), and the ASX200 (up 8.5 per cent). But Halse says there is more room to run – especially since roughly 50 per cent of Japanese companies still trade below their book value, indicating they are undervalued.
“We’ve reached a tipping point in the corporate governance reform where management now have to pay more attention to shareholder interests,” he said. “Japanese corporations would also love to throw out their fax machines, but it’s hard to do that because suppliers and customers still use them, so everyone needs to change at once.”
The poster-child for Japan’s corporate reform, he added, has been Hitachi. The conglomerate had 22 listed subsidiaries in 2008, when it reported a ¥787 billion loss, but has since sold them all to private equity firms and industrial buyers, resulting in a leaner and faster-growing business. (The company’s share price has risen 550 per cent in the last five years).
The trend of stripping down continues. Beermaker Sapporo this week granted preferential rights for the sale of its real estate business to private equity firms KKR and PAG in a deal worth more than ¥400 billion, following shareholder pressure to sell off its real estate holdings to focus more on its alcoholic beverage business.
“Shedding excess assets, increasing dividends, and buybacks have been key to the revival of Japanese equities,” said Antipodes chief investment officer Jacob Mitchell. “But what we haven’t seen yet is domestic investors buying equities in meaningful numbers.”
Mitchell says if inflation holds, households could shift from cash and deposits into other asset classes, including equities, which could drive the Nikkei 225 higher. His top stock picks are chemicals giant Shin-Etsu and fridge and air conditioner manufacturer Daikin.
The same point was also made by Miyuki Kashima, head of Japan investments for Fidelity International.
“The memory of that spectacular decline of 80 per cent [in the 18 years from the Nikkei’s 1989 peak] has not left the mind of many investors,” she said.
“They still consider the equity market a scary place to be, even though we [now] have workers have never seen the market decline. As the generations change, the memory of Japan being a market which only goes down is starting to disappear.”
Hideyuki Ishiguro, chief strategist at Nomura Asset Management, said newly elected Liberal Democratic Party leader Sanae Takaichi’s bid to become Japan’s first female prime minister – which hinges on gaining backing from the Osaka-based Japan Innovation Party after the LDP’s long-time coalition partner Komeito quit the ruling alliance last week – would be a key driver of the Nikkei 225 in the next month.
“If Takaichi is elected, expectations of policy continuity and pro-growth measures could lift equities, potentially restoring an upward trend,” he said.
Singapore-based Glen Barnes, head of Asia fundamental research for Regal Funds Management, said he was most bullish about Japan’s construction sector, in particular major contractors Kajima and Taisei.
“Takaichi’s pro-growth agenda will further support momentum and profitability for the majors, primarily through capital investments into strategic sectors,” he said.