BlackRock Inc., the world’s biggest asset manager, and Amundi Asset Management, Europe’s largest money manager, both see Japan going from strength to strength.
Foreign investors are pouring money into the country’s stock market, whose blue-chip gauge surpassed its 1989 peak last week. Both asset managers expect earnings growth and changes in corporate governance will keep the boom going.
“Japan’s equity rally has room to run,” wrote BlackRock’s Jean Boivin and Wei Li in a note to investors. Japanese stocks “can best their all-time highs.”
The Nikkei 225 has gained 17% so far this year, making it the world’s best-performing major gauge. JPMorgan Securities Japan Co. said the Nikkei could rise to 42,000, an advance of a further 7%. The gains will likely bring more domestic investors into the market, according to the firm.
“This will spur corporates to increase growth investment and improve capital efficiency, and make institutional and individual investors take more interest,” wrote Rie Nishihara, JPMorgan’s chief Japan equity strategist, in a note to investors.
In addition to the the country’s stock market, the yen will rise against the dollar this year, making investment more profitable if equity holdings are unhedged, according to Eric Mijot, Amundi’s head of global equity strategy.
Amundi forecasts the yen will gain to 135 to the dollar. Foreign investors face a key decision of whether or not to hedge the Japanese currency. The yen has weakened more than 6% against the dollar so far this year.
“We should unhedge yen when we invest in Japan from an international basis,” said Mijot, who considers the currency undervalued by 40%. “We have to protect from where the risks could come.”
The catalyst for a stronger yen will be the US Federal Reserve cutting rates rather than the Bank of Japan ending negative rates, according to Mijot. He expects the BOJ to move by April and the Fed to cut rates in May or June.
Mijot’s recommendation to not hedge echoes asset managers including Morgan Stanley and Robeco, while BNP Paribas Asset Management still prefers to guard against currency fluctuations.
“We’ve removed the vast majority of hedging now,” said Joshua Crabb, head of Asia Pacific equities at Robeco Hong Kong, adding that the yen at 150 is “as low as it gets.”
The currency will get support from both the Fed ceasing to hike rates and the BOJ shifting its policy, according to Crabb. Japan’s central bank has been laying the groundwork to deliver its first rate hike since 2007 as inflation has remained above its price target of 2% every month since April 2022. Swaps imply that the market expects a 76% chance of a rate hike in Japan by April.
If the BOJ changes policy earlier than April, “a lot of people are gonna get really burned,” said Crabb, who has dropped hedging slowly in stages over the past few months. “I don’t wanna be in that camp.”
Hedging still remains an attractive option for dollar-based investors who expect further yen weakness, given the strong inverse correlation between the yen and Japanese stocks. Three-month costs to hedge against a depreciating yen are minus 5.6%, indicating investors who take bearish bets on the currency can earn profits as long as the yen doesn’t appreciate significantly. The yen is expected to strengthen to 137 against the dollar by end of 2024, according to estimates compiled by Bloomberg.
Within Japanese equities, Amundi likes stocks that benefit from corporate governance changes and those linked to high dividend yields. A rising yen will help small-cap value stocks that are linked to domestic demand. The firm manages around $2.25 trillion in assets, according to its website.
“Japan is a robust compromise,” Mijot said. He added that while US stocks have high valuations and earnings growth is better than rest of the world, Europe is the exact opposite. “Japan is in the middle, it’s not cheap anymore but earnings are surprisingly up, we get a nice story.”
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