Japan Stocks May Lure International Investors on Valuations After Selloff

Investors from outside Japan may accelerate purchases of the country’s equities after losses from its worst earthquake drove valuations to their lowest level since 2009, according to brokerages.

UBS AG and Nomura Holdings Inc. said overseas investors, net buyers of Japanese stocks every week this year through March 11, are likely to purchase after the Topix index lost 9.3 percent last week. Billionaire investor Warren Buffett on March 21 said the declines provided a “buying opportunity.” The Topix ended at 868.13 yesterday, 20 percent above the intraday low on March 15, data compiled by Bloomberg show. The index is 6.3 percent below its close before the magnitude-9.0 temblor.

Last week’s decline “made valuations of Japanese stocks overwhelmingly cheap,” said Shoji Hirakawa, UBS AG’s chief equity strategist for Japan. International investors are “betting that the growth rate of the nation’s economy will remain unchanged even after the quake,” he said.

The Nikkei 225 Stock Average tumbled 10 percent to 9,206.75 last week following the March 11 quake and tsunami on concern the ensuing nuclear accident would cripple the economy. The combined drop of 16 percent on March 14 and March 15 was the biggest over two days since the 1987 crash. The sell-off drove the average valuation of 1,666 shares listed on the Topix index to 0.91 times book value, the lowest since March 16, 2009.

‘Starkly Undervalued’

“With most equity markets having had a lift during the global recovery, Japan now stands out to foreign equity investors for how starkly undervalued it is, especially when the crisis gave it a whack,” said James Holt, Sydney-based director of BlackRock Investment Management (Australia) Ltd., which oversees about $40 billion.

The Standard & Poor’s 500 Index trades at 2.2 times book value, while the Stoxx Europe 600 Index trades at 1.6 times, data compiled by Bloomberg show. Stocks in the MSCI Asia Pacific excluding Japan Index fetch an average of twice the value of their assets minus liabilities.

Foreign institutional investors, who represent 70 percent of stock trading in Japan, have been weekly net buyers of the nation’s stocks since the period ending Oct. 29 through March 11, according to data compiled by Bloomberg. That’s the longest streak since the 26 weeks through Dec. 9, 2005. The Tokyo Stock Exchange will release data for last week on March 25.

Portfolio ‘Weight Loss

“Although it seems hedge funds cut their speculative holdings in futures, I suspect overseas pension funds have bought Japanese shares to boost their asset allocation because of weight loss in Japanese equities last week,” said Kenichi Hirano, general manager and strategist at Tachibana Securities Co. in Tokyo. “Foreign investors are likely to be net buyers last week too.”

Japanese stocks rose for a second day yesterday as the nation made progress in stabilizing reactors at a damaged nuclear plant. The Nikkei climbed 4.4 percent to 9,608.32 on the Tokyo Stock Exchange.

“Reactions from overseas I got through exchanging e-mails after the quake were surprisingly positive,” Tokyo Stock Exchange Group Inc. president Atsushi Saito said at a regular press briefing yesterday in Tokyo. Overseas investors had been net buyers of shares on the exchange during the March 14 and 15 rout, Saito said in a note on the bourse’s website on March 15.

Radiation containment units at Japan’s Fukushima Dai-Ichi nuclear reactors are intact and the situation at the plant “is on the verge of stabilizing,” a U.S. Nuclear Regulatory Commission official said March 21. Japanese Prime Minister Naoto Kan said he could see “light at the end of the tunnel” even as smoke at two reactors hampered efforts to restore cooling systems at the Fukushima plant.

“Foreign investors are taking the view that Japan will recover from the earthquake,” said Masahiko Sato, an analyst at Nomura. It’s “unlikely for them to sell far more Japanese stocks than they buy,” he said.

To contact the reporter on this story: Toshiro Hasegawa in Hong Kong at thasegawa6@bloomberg.net; Monami Yui in Hong Kong at myui1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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