The Topix index’s current P/E ratio now at 17x, Morgan Stanley estimates, could rise to 20x by the end of 2030 in a base case, and 22x in a bull case.
In the last period, the Japanese stock market has experienced a strong rally, attracting the attention of investors.
But is it the right time to invest in Japan, or are investors simply getting caught up in a grand narrative? The Japanese stock market recovery certainly makes for a compelling narrative, however, questions remain, especially considering the sharp decline in the yen which has eroded many of the gains made by foreign investors.
“Japan is the perfect market for anyone who thinks they’ve missed out on U.S. tech stocks,” says Pelham Smithers, a longtime Japan analyst. He cites over 50 Japanese AI-related stocks, which can be had at about half the valuations you pay for the Nasdaq Composite.
However, Schroders’ Scott MacLennan expresses less enthusiasm. After a week in Tokyo, his prevailing sense is that although the Japanese stock market is at an exciting inflection point, it is important to be cautious, considering that after a period of sustained strength, we may now be entering a period of digestion. “I would be cautious about becoming too optimistic, even if it looks very attractive in the long term,” he says.
This caution seems to be a widespread sentiment. Since the Nikkei 225 broke records three months ago, it has traded sideways, and the Topix index, although up 15% year to date, has lost much of the energy it started the year with.
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Japanese companies have worked hard to meet investor expectations for higher return on equity and greater attention to the cost of capital. Share buyback announcements by Japanese companies in the last financial year topped ¥10tn for the first time, according to Goldman Sachs’ Bruce Kirk, and he estimates a record ¥1.2tn of buy-backs was then announced in April. However, the net buying of Japanese stocks by foreign investors has been relatively weak.
There is excitement about the introduction in January of a tax-protected investment scheme (with a structure very similar to a UK ISA and known as Nisa) and its ability to attract some of the $7tn that Japanese households currently hold in cash.
Now, the Japanese government and the Tokyo Stock Exchange are aligned in the mission to change this. In late May, two conferences held in Tokyo by Morgan Stanley MUFG and CLSA attracted around 1,500 fund managers from around the world, including sovereign wealth funds from the Middle East and pension funds from Canada and Latin America.
The change is palpable, and as Japan frees itself from the deflation that has held it back for a quarter of a century, domestic and institutional investors will begin to feel pressured to build a hedge against inflation. Japan is transitioning to a new growth-oriented economy.
"In order to financially support this virtuous economic cycle, we are strongly promoting the establishment of a nation’s wealth management," said Kishida, the prime minister.
As this process continues, and Japanese families become more actively invested in Tokyo stocks, valuations of the entire market are expected to rise. The Topix index’s current P/E ratio now at 17x, Morgan Stanley estimates, could rise to 20x by the end of 2030 in a base case, and 22x in a bull case.
Original article published on Money.it Italy 2024-06-08 06:18:00. Original title: È davvero il momento giusto per investire in Giappone?
