From a dog to a darling, Japanese stocks have finally found favour. After returning 52% for investors last year, there are still 5 reasons this market has further to go, with opportunities most have missed. There is the potential for a catch up within the stock market, mispricing, earning growth, restructuring and increased buying. Sectors to benefit from reflation and growing domestic demand within a still unloved part of the market may profit.
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1. Catch Up Potential
Japan has the only small cap sector to have lagged large caps last year. Elsewhere, optimism has driven investors more towards the higher risk, higher growth shares of smaller companies so those in Japan may be due a catch up.
Some Japanese small cap stocks are followed by only a couple of analysts: substantial opportunity to profit from under researched investments whose prices don’t accurately reflect their value.
3. Reality versus Hope
The rising value of Japanese shares is now mainly being driven by growth in earnings. This is in contrast to investors’ willingness to pay higher prices predominately in expectation of earnings growth, which has been driving markets elsewhere.
4. Clear Catalysts
Japanese companies will benefit from consolidation, restructuring and reform. Merger and acquisition deals have hit a new high over the last year already. Furthermore, companies are starting to benefit from 2 decades of cost-cutting.
5. More Room To Buy
Japan’s $1.16 trillion Pension Fund, the world’s largest, is beginning to buy more domestic stocks, with these investments accounting for a mere 8% of their portfolio. In addition, this month tax exemptions on investing in domestic stocks were launched in Japan to boost demand from individual investors.
How To Play It
Sectors to benefit from reflation and growing domestic demand are:
– Financials and insurers
– Real estate and construction
– Transport and communication