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Foreign investors in swoon over new JapanPosted by Retirement on: 2005-09-16 12:16:29 in category:
Investments [ Print | Permalink / 0 Comment(s) ] By Jeremy Gaunt, European Investment Correspondent LONDON (Reuters) - Foreign investors have embarked on a passionate affair with Japanese stocks and are hoping that domestic Japanese investors will soon join them in their ardor. Although often seduced before, only to be met with disappointment, many overseas investors are looking at Japan's improving economy and prospects of long-term economic renewal and saying that this time things are different. "It's real," said Andy Brunner, chief investment strategist at Britain's Forsyth Partners, a fund researcher and investment manager. "Enough structural changes are taking place that this is actually a real turn in the economy and a real turn in the market." The result has been what some investors see as the start of a long-term bull market in Japanese equities. The Nikkei is up nearly 13 percent so far this year while the broader TOPIX has gained more than 15 percent. Merrill Lynch's latest global fund manager poll showed that Japan was far and away the region where investors would most like to be overweight over the next 12 months. Some 41 percent of Merrill's respondents also said the Japanese corporate profit outlook was the most favorable among world markets. They also picked the yen as the currency most likely to appreciate compared with the dollar and the euro . The poll, moreover, was conducted before Prime Minister Junichiro Koizumi's sweeping re-election last Sunday, bringing with it a mandate for further structural reform. LOCAL SUPPORT Money is certainly flowing into Japan. Some 687 billion yen worth of Japanese equities were bought by foreigners in the week to September 10, just ahead of the election. On the other side of the ledger, however, Japanese investors appear to be looking elsewhere. They bought 801 billion yen worth of foreign assets -- mainly bonds -- in the same week. "Japanese investment has settled into a trend of increasing outflows just as foreign investment in Japan has been picking up," UBS said in a note. Klaus Wiener, head of research at AMB Generali Asset Managers in Cologne, also notes that Japanese commercial banks hold relatively small exposure to domestic equities. He said they held in the region of 11 percent of their investments in Japanese shares compared with more than three times that in 1999. All this could turn into an added bonus for foreign investors, who are already bullish on the structural reforms. "If the Japanese domestic buyers come back into play, that could have a further impetus," Wiener said. "We are very bullish on Japan." The question of if and when domestic investors return to the stock market will be the key issue for the rest of the year, according to Christopher Wood, Hong Kong-based strategist at CSLA Asia-Pacific Markets. "When the big domestic institutions return they will start by buying blue chips. This is why the blue chips are due a period of outperformance," he said in a note. IN THE POST The fast run up of Japanese stocks has raised some concerns. Swiss-based wealth manager BSI, for example, recently issued a sell recommendation on the TOPIX, suggesting it was well above its fair value. But many investment firms appear to be settling in to the Japanese market based on a view that structural reforms are already bearing fruit and are likely to continue apace under the newly elected Koizumi. France's AXA Investment Managers increased its Japanese equities exposure in August and said in its September strategy update that it was maintaining the stance. "If growth is sustained and restructuring continues, then earnings could surprise on the upside," it said. Forsyth Partners' Brunner said his firm currently had a 15.5 percent weighting in Japanese equities compared with a 10 percent benchmark. "We wonder whether we ought to go to a 20 percent weighting," he said. Citigroup Private Bank is bullish both near-term and long-term. It told clients on Thursday: "Valuations appear very attractive." One key to the continuing lovefest is likely to be Koizumi's privatization of Japan Post, the huge postal conglomerate encompassing Japan's largest insurer and a savings bank that is the world's biggest deposit-taking institution. The two together have more than $3 trillion in investment assets. "Japan Post is like an enormous wet blanket over Japanese life," said Mark Burges Watson, co-founder of specialty equity researcher and brokerage Japaninvest. "It has acted as a massive dampening on Japan's financial spirit." He noted that the current rally was unlikely to keep going in a straight line but said there had been a fundamental change in Japan and that this was not another false dawn. "The corrections will become smaller and the rallies will become larger," he said. "The crucial reforms in Japan are under way and this is a multi-year bull market." 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