Man Group shares Warren Buffett’s renewed optimism for Japanese stocks

STOCKS in Japan are primed to outpace global peers this year, as improving corporate-governance standards and the central bank’s potential policy normalisation burnish the nation’s appeal for foreign funds, said Man GLG.

Warren Buffett’s most recent endorsement of the market and the end of global rate hikes are also positive catalysts, noted Jeffrey Atherton, head of Japanese equities at UK-based Man GLG, a unit of hedge fund Man Group.

“Medium-term, we are very optimistic,” he said in an interview last week. “It does seem that the pace of change in Japan is accelerating.”

Atherton is lead manager of the Man GLG Japan CoreAlpha Equity fund, which has returned 18 per cent over the past year, beating 94 per cent of its peers, data compiled by Bloomberg showed. He and his co-managers – Adrian Edwards, Stephen Harget and Emily Badger – were ranked the second-best money managers in Japan by Citywire in February, based on average total returns over the previous 12 months.

The Tokyo Stock Exchange triggered a rally in a number of Japanese stocks in February by saying it would ask companies trading below their book values to come up with capital improvement plans starting in spring. Buffett, a known value investor, added to the optimism this month when he said he had raised his holdings of Japanese equities.

“Many investors are still not aware of the corporate governance movement and see Japan as a global cyclical market,” Atherton said. “The news of Buffett’s investment has an effect on sentiment, but also hopefully an effect on foreign money actually coming into Japan, which hasn’t happened for many years.”

The broad-based Topix index of Japanese shares has rallied 7.4 per cent over the past 12 months, while the MSCI All-Country World Index has fallen 5.5 per cent. The outperformance has been shrinking, however, with the MSCI gauge slightly beating the Topix this year.

Looking ahead, Atherton said two of the main things to watch will be corporate earnings and the next two Bank of Japan (BOJ) decisions for any further signs of policy normalisation. 

“There’s a high chance that the BOJ tells us what it’s going to do by the end of June, and the next three months could actually set the stage for the second half of the year,” he said. 

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The top holdings of Atherton’s fund include Panasonic Holdings, Sumitomo Mitsui Financial Group and Mitsubishi Estate, based on data compiled by Bloomberg. 

Atherton said he favours “unloved” domestic-focused stocks, including those in the retail, real estate and construction sectors.

He added that the government and the BOJ’s push to keep inflation stable at around 2 per cent, the country’s reopening after Covid, and stronger purchasing power due to excess savings during the pandemic are all likely to drive spending and the top lines of corporates.

“We’re slightly less positive about financials,” he said, adding that the collapse of Silicon Valley Bank “showed what could happen when a bank goes wrong”. At the same time, insurers are better placed as they as not as exposed to liquidity issues when Japanese interest rates potentially rise, he said.

Even after their rally over the past year, the main Japanese stock indices are still well below their historical peaks. The Nikkei 225 Stock Average is currently around 26,650. In December 1989, it closed at a high of 38,915.87 before the collapse of what become known as the “bubble economy”. 

“The current market is still lower than where I started,” said Atherton, who has more than three decades of experience as a manager of Japanese equities. “I’m very hopeful that Japan will have a run, and go through that 39,000 level at some point in the not-too-distant future, hopefully before I retire.” BLOOMBERG