The Japanese equity market japan exchange group is the 3rd largest equity market in the world and responds to global economic conditions more sensitively than other developed markets.
Japan as Number One: Tokyo Stock Market Is Asia's Best in 2021 is increasingly gaining media and investor attention.
Many global investors, however, still associate investing in Japanese equities with "Japan lost decade "and the narrative of japan as a country with no growth and a stock market that chronically underperformed the U.S. and even European equities.
The coronavirus pandemic has done what seven years of Abenomics could not: push Japan's Nikkei 225 benchmark above the 25,000 mark for the first time since 1991.
Japanese stocks have already been outperforming global markets since September, and the trend most probably will continue this year as the Monetary and fiscal policy backdrop is "quite market-friendly" for Japanese stocks.
According to Bloomberg data, Japanese companies are beating analysts' earnings expectations by the widest margin in almost three years, adding to the appeal of local japan stocks at a time when brokers are expecting a return of foreign investors.
According to Bloomberg data, TSE 2 Tokyo Stock Exchange Topix 2nd sector index with+13.27% is the 5th best performing market in Asia year-to-date,
Japan stocks are outperforming U.S equities. Year-to-date USD performance Nikkei 225 +8.56% compared to the S&P 500 index +4.24%
Increasingly global investors focus on the narrative that when the global economy keeps recovering, Japanese stocks might offer more reward than U.S. stocks would.
The Japanese stock market is heavily dominated by cyclical names, and stock valuations are cheaper compared to global counterparts at a time when many portfolios and global investors are still mostly underweight Japanese equities.
Japan may also have an advantage given its "steadier" macroeconomic climate compared to Europe and U.S. The Suga administration's market-friendly fiscal and monetary policies and ambitious administrative reforms will also contribute to the continued boost in Japanese stocks.
Looking back at the history of the Japanese stock market, the creation of the 1980s stock market bubble, the "lost 2o years" since the 1990s, the Koizumi bull market of 2005, Japanese stocks since 2012 introduction of "Abenomics" were all orchestrated in large part by Japanese policy decisions. Monetarists believe that the Bank of Japan (boJ ) monetary policies are to blame for the lost 20 years.
While traditionalists believe the blame should be placed on the lack of structural reform in japan ( such as needed pro-growth deregulation of corporate laws and change in taxation codes, change in immigration policy, etc.)
Japan investment bank & brokerage sell-side consensus view increasingly advocate Investors should keep watch on cyclical sectors like machinery, electronic components, and precision manufacturers.
Japanese multinational imaging and electronics company Ricoh Company, Ltd., with a +75.18% year-to-date return, is the best performing stock in the nikkei 225 index year-to-date. According to Bloomberg data, the japan investable universe currently trades at a blended forward P/E of 15.4x. Health care with 30.2x is the most expensive Japanese stock market sector, consumer services 26.6x, technology 20.5x consumer goods 15.7x, industrials 15.3x basic materials, 12.6x telecoms, 12.6x Utilities 12.5x, financials 10.5x oil & gas 9.8x.
In line with the rebound in oil prices, japan Oil & Gas sector with +36.1% return is the best performing stock market sector so far this year, followed by Japanese financials + 20.9%, basic materials +20%, consumer services, 18.4%, industrials +17.2% technology +15% utilities + 13.4%, telecoms +13.2% consumer goods 12.4%, health care the most expensive sector year-to-date is also the worst-performing sector with only +4.8%.return, as global investors increasingly focus on rising U.S bond yields and what this could mean for stock market sector valuations.
In my view, Japan value stocks with an ESG focus will emerge as the new leaders in the market's continued recovery from the coronavirus impact.
As part of its preparation for the Tokyo Olympics, Japan, as a country, its companies and people increasingly focus even more on sustainability. According to earth.org, japan was Ranked 59th in the Global Sustainability Index.
Global Investors should take note that Japan's environmental policy developments are expected to gain further momentum, and with it, ESG stocks in japan could be the sweet spot in the market due to Japan's "Green growth strategy."
Rainer Michael Preiss serves as Portfolio Strategist at Golden Equator Wealth Singapore.
