BlackRock Inc., the world’s No. 1 asset manager, is betting free trade will help Japan’s smaller companies outperform their larger counterparts, which will see gains taper off as the yen stabilizes.
The Nikkei 225 Stock Average of the country’s biggest companies will add a further 20 percent by March 31, 2014, as Japan’s currency settles at 95-100 to the dollar, said Shinichi Kawano, Chief Investment Officer for BlackRock Japan Co. Smaller agriculture and medical companies are also poised to benefit if Prime Minister Shinzo Abe can push through reforms such as signing up to the Trans-Pacific Partnership after upper house elections in July, he said.
“I’ve been in the industry for over 20 years, and this is the most bullish I’ve ever been,” Kawano said in a March 21 interview. “The most interesting stocks are small- to mid- cap companies as they have more room to grow. We may see the market architecture change as smaller companies with great ideas become leaders while unprofitable large cap stocks fade away.” The Jasdaq Index of 912 smaller Japanese companies has surged 51 percent in Osaka since Nov. 14 when elections were announced that swept ruling Liberal Democratic Party into power. The gauge, which reached its highest level in five years on March 21, is outperforming the Topix Index, which tracks the nation’s biggest 1,697 listed shares, and the Nikkei 225, which is up 42 percent in the same span.
Companies on the Jasdaq trade at 19 times estimated earnings, compared with 22 times for the Topix and 24 for the Nikkei 225, according to data compiled by Bloomberg.
“Valuations aren’t very expensive,” said Kawano. “The market hasn’t fully taken into consideration the currency yet.”
Kawano helps manage the BlackRock Global Funds Japan Small & Mid-Cap Opportunities Fund, which has 18 billion yen ($191 million) in assets, according to data compiled by Bloomberg. The fund has returned about 40 percent in the past year, beating 98 percent of its peers, the data show. The Jasdaq is up 47 percent in the period.
The fund’s top holdings include Asahi Intecc Co., which makes medical tools and has surged 107 percent since mid-November, and Tsukui Corp., Japan’s No. 1 operator of nursing homes, up 63 percent in the period after increasing its profit forecast by 26 percent. BlackRock had $3.79 trillion in assets globally at the end of 2012, according to its website.
Abe announced on March 15 that Japan will join negotiations on the U.S.-led TPP trade accord with 11 other member states. The country has also entered free trade talks with the European Union and China and South Korea.
While agricultural companies have resisted free-trade negotiations, Kawano says the sector may benefit as wealthy consumers overseas gain access to Japanese produce, prized for high quality and safety. He declined to name any companies.
The Topix Fishery, Agriculture & Forestry Index has lagged other industries on the country’s broadest gauge, rising 26 percent since Nov. 14. That’s the third-lowest return of the 33 groups.
Japan’s participation the TPP would boost gross-domestic product by 0.66 of a percentage point or 3.2 trillion yen ($34 billion) if it abolished all tariffs, according to a government statement on March 15. Almost two-thirds of Japanese voters support joining the trade talks, according to polls from the Mainichi newspaper and the Yomiuri newspaper.
“There is risk; risk that Abe may fail to persuade the people, and the agricultural society have made negative campaigns against the TPP,” Kawano said. “But I think the agricultural society understand that we have to do it.”
Abe’s government unveiled a 10.3 trillion yen spending plan in January while the premier convinced the Bank of Japan to double its inflation target to 2 percent. Expectations that Abe can force the BOJ to bring forward plans for unlimited asset purchases have helped send the yen plunging 18 percent against the dollar since November, boosting the overseas earnings outlook for the nation’s exporters.
As part of his reform agenda, Abe has also proposed relaxing protections for lifetime employment, making it easier to hire and fire people, as well as abolishing a law barring the online sale of drugs.
“Actual growth will come from the relaxation of regulations,” Kawano said. “There are many great smaller companies in Japan that are like a seed under the ground, and weird Japanese regulations are stamping on them and stopping them from growing.”
Kawano began his career in 1990 at Dai-Ichi Securities Co., a Japanese brokerage that merged with Mitsubishi UFJ Morgan Stanley Securities Co. in 2000. He joined BlackRock in 2001, becoming manager of Asia Pacific’s risk and quantitative analysis before taking on his current role, according to his biography.
“Japan doesn’t get many chances like this,” said Kawano, who started his career in 1990 at “If they fail to grab this chance, then there isn’t going to be much hope left for Japan.”