Foreigners Add Most Japan Stocks Ever in Bullish Abe Bets

Foreigners are boosting holdings of Japanese stocks by the most on record, putting more at stake for overseas investors as Prime Minister Shinzo Abe seeks to revive the world’s third-largest economy.

Buyers from outside Japan pumped 12.9 trillion yen ($125 billion) into the nation’s stocks this year through November, Tokyo Stock Exchange data show, as the Topix index climbed 44 percent to lead developed markets. The inflows surpassed the previous highest total in 2005, which preceded a 1.9 percent increase for the Topix the following year.

Abe’s policies to lift wages, weaken the yen and boost profits will push shares higher in 2014, according to Wayne Bowers at Chicago-based Northern Trust Corp., which oversees $803 billion. Since Japan’s premier asked investors on the floor of the New York Stock Exchange on Sept. 25 to “buy my Abenomics,” the Topix has returned about half the rally for the Standard & Poor’s 500 Index.

“There isn’t any lack of commitment from Abe to keep going and keep pushing this,” Bowers, chief executive officer for Europe, the Middle East Africa and Asia Pacific at Northern Trust, said in an interview in Sydney last month. “You don’t need a significant amount of underlying growth to see another move up in equity-market performance.”

Since Abe was elected on Dec. 16 last year, his program of fiscal stimulus, monetary easing and economic reforms known as Abenomics helped weaken the yen 23 percent against the dollar and lift the Topix 55 percent.

Foreign Flows

Investors from outside Japan bought 2.3 trillion yen more shares than they sold on the Tokyo and Nagoya securities exchanges in November, the Tokyo Stock Exchange’s latest data show. That was the tenth month this year that foreign investors were net buyers of Japanese stocks, compared to just one month of net purchases by both domestic individuals and local financial institutions, the data show. November net purchases were the highest since April.

The Topix fell 0.7 percent in Tokyo today to close at 1,242.23.

Foreign investors were net buyers every month during 2005 as then-Prime Minister Junichiro Koizumi battled resistance from his own party and won a snap election in pursuit of postal reforms that proponents said would help revitalize the economy. The Topix increased 44 percent during the year, a gain only topped on three occasions since 1953.

Yoshihisa Okamoto, the Tokyo-based head of equity research at Mizuho Asset Management Co., said the Topix will climb to 1,750 by the end of next year. That’s a 40 percent advance from yesterday’s close and the most bullish forecast of six analysts surveyed by Bloomberg, whose average estimate is for a 19 percent increase. Okamoto’s firm manages 3.73 trillion yen in assets.

Investor Vigor

“The vigor seen from foreign investors into Japanese stocks is also changing the behavior of domestic investors,” he said in a phone interview Nov. 27. “Domestic investors, including public-pension funds, are changing their attitude toward the stock market. The environment is getting better to take on more risk.”

Earnings jumped last quarter to about 5.5 trillion yen at more than 1,280 of Japan’s largest listed non-financial firms, the most since 2007, according to data compiled by Bloomberg. Sentiment among large manufacturers is the strongest since the early stages of the global credit crisis in 2007, according to the latest reading of the quarterly Tankan index.

“I have come to tell you that Japan will once again be a country where there is money to be made, and that just as Gordon Gekko made a comeback in the financial world after 23 years of absence, so too can we now say that ‘Japan is back’,” said Abe at the NYSE, referring to the protagonist in the 1987 film “Wall Street.” The sequel was released in 2010.

Bigger Gains

AMP Capital Investors Ltd., a unit of Australia’s biggest publicly traded asset manager, increased investments in Japanese stocks in November. Nader Naeimi added to holdings for his dynamic asset allocation funds, based on an outlook for the yen to weaken to 107 per dollar and the Nikkei 225 Stock Average to rally to 18,000 in the first quarter of 2014. The equity gauge closed today at 15,341.82.

“Now with Abenomics and some push towards inflation we should see the Japanese share market outperform U.S. equities,” Naeimi, the Sydney-based head of dynamic asset allocation at AMP Capital Investors, which manages $131 billion, said by phone.

Consumer prices excluding energy and fresh food climbed 0.3 percent in October from a year earlier, the most since 1998.

GPIF Recommendations

The Government Pension Investment Fund, the world’s largest pool of retirement savings, was advised last month by an expert panel to put more of its 124 trillion yen into private equity, commodities, real-estate investment trusts and overseas assets. GPIF should consider passive investing based on the JPX-Nikkei Index 400, which starts next year and focuses on return on equity, according to a Nov. 20 report by the panel.

Abe’s hand-picked BOJ governor, Haruhiko Kuroda, doubled monthly bond purchases to more than 7 trillion yen at his first policy board meeting on April 4, to try to spur 2 percent inflation in about two years. Abe has said he plans reforms to labor regulations, agriculture, health care and tourism. The cabinet on Dec. 5 approved an 18.6 trillion yen economic package, which includes 5.5 trillion yen in spending, aimed at cushioning the blow of a sales-tax increase next April.

Companies from storage firms to banks are benefiting. Prologis Inc., the world’s biggest warehouse owner, which manages almost 3,000 buildings in 21 countries, will increase rents and spend as much as $600 million a year to develop warehouses in Japan as Abe’s policies boost corporate confidence, its chairman and chief executive officer, Hamid Moghadam, said Nov. 26.

Profit Outlook

Sumitomo Mitsui Financial Group Inc., Japan’s second-biggest bank by market value, raised its full-year profit forecast 29 percent on Nov. 13 as equity-market gains boosted earnings in the first half.

“It’s an interesting argument whether Abe’s reforms are really going to work or not,” said James Moffett, who oversees $10 billion in international assets at Scout Investments in Kansas City, Missouri, said in a Dec. 4 phone interview. Moffett added that he liked Fuji Heavy Industries Ltd. the most, followed by Honda Motor Co., Toyota Motor Corp. and Japan Tobacco Inc.

Fuji Heavy, the maker of Subaru cars that gets 65 percent of its sales outside Japan, has surged 162 percent this year. Honda, which gets more than 80 percent of revenue abroad, advanced 32 percent this year, while Toyota has added 54 percent. Japan Tobacco, Asia’s largest listed cigarette maker with almost half its revenue stream from foreign markets, gained 44 percent.

Volatility Increases

The Topix’s 44 percent surge in 2013 puts it on course for the best annual gain since 1999. Valuations peaked at 1.37 times the value of its companies’ assets in May, the highest since August 2008, according to data compiled by Bloomberg. Volatility on the Topix has surged this year, with 30-day historical volatility rising to an average 23.8, compared with 15.8 in the same period a year ago.

“It’s quite easy for this market to lose 10 percent very quickly,” Gary Dugan, who helps oversee about $53.4 billion as the Singapore-based chief investment officer for Asia and the Middle East at Coutts & Co., the wealth management unit of Royal Bank of Scotland Group Plc, said in a phone interview Nov. 15. If “the economy struggles next year, which is what we believe, this market could lose you money. That is the worry we have.”

Better Opportunities

About 18 percent of 272 investors surveyed in November by Bank of America Corp. listed Japan as their favorite developed-equity market next year, compared with 44 percent for the U.S. and 31 percent for Europe.

Citigroup Inc.’s Inflation Surprise Index for Japan climbed to a record 34.8 last month, signaling price data have surpassed economist estimates more frequently than they fell short.

“By getting closer to our target of defeating deflation and stabilizing prices, the economy will grow, companies will be more profitable and they will share those profits with employees,” Abe said in a Dec. 6 interview with Bloomberg News at the prime minister’s official residence in Tokyo. “Profits rise, then salaries rise, so consumption will increase, and again profits will rise. We get into a virtuous cycle and we want to achieve that as soon as possible.”

Inflation Outlook

BOJ policy makers forecast last month that the core inflation rate will advance to 1.3 percent in the year starting April 2014 and 1.9 percent the following fiscal period after accounting for increases to the sales tax.

“With radically game-changing BOJ monetary reflation pressing ahead in any case, we expect 2014 will offer a second year of progress beyond Japan’s two ‘lost decades’, with likely continued equity outperformance,” said Michael Kurtz, Hong Kong-based chief global equity strategist at Nomura Holdings Inc., Japan’s largest brokerage.

Firm Topix 2014 year-end target

Mizuho Asset Management 1,750 Mitsubishi UFJ Asset Management 1,500 Amundi Japan Ltd. 1,325 BNP Paribas 1,500 Nomura 1,500 Barclays 1,375 Mean: 1,492
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