Topix Rout Means Time to Buy for $1.4 Trillion Asset Manager

  • Fund's investments in Japan firms surge to 1.1 trillion yen
  • Expects Topix to rise as earnings increase amid inflation

Capital Group Cos., which oversees $1.4 trillion, is snapping up Japanese shares on a bet they’ve been unfairly punished in the global selloff.

The world’s seventh-largest asset manager is buying stocks that were too expensive before the rout while adding to existing holdings, said Akira Fuse, an investment specialist at Capital International K.K. in Tokyo. The firm is picking up everything from sensor makers to banks, convinced a slowdown in China won’t derail Japan’s share rally under Prime Minister Shinzo Abe.

About $5.8 trillion was wiped from global equities last month as China shocked markets by devaluing the yuan and investors weighed the specter of higher U.S. interest rates. Japanese shares were among the worst hit, with the Topix tumbling to its biggest monthly loss in three years. Valuations slumped to the lowest since October as foreign investors sold at the fastest pace since at least 2004.

“We’re still positive,” Fuse, who helps manage the company’s 1.1 trillion yen ($9.2 billion) in Japanese equity funds, said in an interview in Tokyo on Sept. 7. “The drop has been a little excessive.”

Los Angeles-based Capital Group is a long-term investor whose products include American Funds, one of the largest mutual-fund families in the U.S. by assets.

High Conviction

Capital Group’s Japanese stock investments are overseen by three fund managers covering value, large-cap growth and small-cap growth strategies. They dub companies they all agree on “high conviction” stocks. These account for 20 of their 85 Japanese investments and half of assets in the country, Fuse said.

Capital Group’s holdings in Japanese stock funds have more than quadrupled since the end of December 2012, according to Katsunori Adachi, a senior manager for marketing communications at Capital International. That excludes holdings in the nation’s companies through the group’s global funds, he said, declining to give a total figure.

While Capital Group is concerned about China’s slowdown, the broad selloff in Japanese stocks has gone too far, Fuse said. Chinese policy makers will take steps to ensure a soft landing, he said. The group is selling Japanese shares that may be hurt as China’s infrastructure development slows, but remains bullish on firms that benefit from increases in domestic consumption in Asia’s biggest economy. Fuse declined to name individual investments.

“We have to think strategically,” he said. “What’s weak about the Chinese economy now is social investment -- rail, roads, bridges and dams. There’s still room for consumption to grow.”

China Slump

China’s exports fell 5.5 percent in August from a year earlier and the nation’s official factory gauge slumped to a three-year low. Premier Li Keqiang said Sept. 10 the economy was expanding reasonably, and vowed to press ahead with reforms and to keep growth at about 7 percent this year.

The Topix will increase in the medium to long term, boosted by corporate earnings, Fuse said, without giving forecasts. Company profits will rise as the benefits of inflation seep through to the economy, and improved corporate governance leads to higher return on equity in two or three years, he said. The equity measure slipped 1.2 percent in Tokyo on Monday.

Earnings per share for Topix companies is forecast to rise 9.8 percent in the next year. ROE for companies in the gauge stands at 8.6 percent, compared with 11 percent for an index of global shares.

Excessive Selloff

Japan’s sensor makers will profit as devices like smartwatches become more popular, Fuse said. Bank earnings will climb as lending and interest income increase amid higher rates, he said. Capital Group is buying shares in smaller companies that have niche products and tend to be overlooked by the investment community, he said.

“Especially sensors,” Fuse said. “Japan has a 40 percent share of the world’s sensor market. As demand increases, there’s huge room for profits to swell.”

Capital Group is the biggest holder of optical-sensor maker Hamamatsu Photonics KK and Murata Manufacturing Co., which supplies components to Apple Inc. It counts sensor-manufacturer Keyence Corp. among its holdings.

Andrew Johnsen, who picks value stocks for the asset manager, has been buying companies that benefit from domestic demand that were excessively sold off during the downturn, Fuse said. Akira Horiguchi and Seung Kwak, who oversee growth shares, have been adding to existing positions, he said.

“The deflationary mindset is changing to inflationary among households and company managers,” Fuse said. “As everyone’s thinking changes, it’s going to have a positive effect on the economy. There’s still lots of room for improvement in the medium to long term.”

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