Sumitomo Mitsui DS Asset Management maintains its bullish perspective on the Japanese equity market with the target of the Nikkei 225 at 32,000 for calendar year 2022.
Investors may wish to turn their own eye on the island nation, one looking to bounce back after Covid-19 and a long way from the current terrible situation in Ukraine.
Fundtruffle speaks to Nobuyuki Koganezawa, senior product specialist for Japanese equity products at Sumitomo Mitsui, on what potential, and drawbacks, investing in Japan can bring.
What developments are you expecting to see in the Japanese market over the rest of 2022?
In other developed countries, the recovery phase has settled and economic growth is predicted to slow this year. However, in Japan, we expect to see the recovery phase begin in earnest from now, and the economic growth rate to accelerate towards a full-scale recovery. We therefore predict a re-rating of the stock market off the back of a recovery in business performance and economic growth.
Is Japan more protected from wider shocks expected this year, such as high interest rates from the US Fed and the invasion of Ukraine?
We should remain aware of the potential risk of a significant impact on the Japanese stock market considering that the current rise in interest rates is associated with a rise in inflation caused by tight supply-side conditions, and this could result in stagflation.
Current geopolitical risks have a less direct impact on Japan, but inevitably pose a risk to the stock market due to risk averse behaviour on a global level. In addition, the Ukraine situation is closely linked to energy supply, and we see that rising energy prices could pose negative impacts such as higher costs and inflation.
As at the end of 28 February, our economist estimates that the Ukraine situation will affect Japanese GDP by -0.53 percent whereas global GDP will contract by -1.28 percent, assuming no international trade for both Russia and Ukraine.
With the looming possibility of a prolonged war with no exit in sight, I don't think we can be too optimistic.
If Japanese stocks are undervalued, what are the reasons behind this and do you expect the stocks to be priced in over 2022?
The undervaluation of the Japanese stock market is thought to be due to its relative growth potential, low ROE and weak governance. However, given the relatively high growth potential of Japanese companies in 2022, and the growing awareness of the need for companies to improve ROE and strengthen governance, it is highly likely that the valuation gap between Japan and markets in other countries, which was expanding historically, will narrow in 2022.
Are you also anticipating strong growth in Japanese Small Cap Value stocks?
This is a very attractive investment area. The excess liquidity in the stock market has reached a significant turning point and the shift from overvalued growth stocks to value stocks is likely to continue.
While large-cap value stocks have been the first to be revalued, the market correction for small- and mid-cap value stocks has yet to begin. The gap in valuations between small- and mid-cap stocks is much greater and there is much more room for revaluation. In the near term, the opaque investment environment is driving funds into safer large-cap stocks, but as a shift occurs from a liquidity-driven market to a fundamentals-driven market, we believe that there will be a re-rating of small- and mid-cap stocks.
Will the move towards semiconductor manufacturing be reflected as an opportunity for investment?
We foresee this situation continuing over the medium term. Despite the short-term cycles in the semiconductor market, demand for semiconductors is shifting from consumer demand, such as for smartphones and PCs, to demand from the corporate side, such as for DX, cloud computing, AI and environmental solutions. As a result, stable growth in demand can be expected over the medium term.
It is important to recognise that semiconductors are becoming a strategic resource for countries in relation to their national security. Therefore, we believe that Japanese semiconductor-related companies are reasonably attractive for investment, while continuing to watch their valuations.
Japan has been plagued with corporate governance issues in the past, such as claims of endemic insider trading and issues within the ‘keiretsu’ system. Do any of these problems still persist?
These are some of the main factors that have led to the Japanese market being undervalued. For small- and mid-cap companies, the language barrier means it is still easier for locals to research in terms of disclosure. However regulations on insider information have been tightened and are becoming more stringent, ensuring that the fair access to information is guaranteed.
On the other hand, in the case of keiretsu, cross-shareholdings still exist, but the new reforms to the TSE classification system are expected to further reduce this.
