As the world’s second-largest pension fund prepares to splash the cash on Japanese equities, experts have tipped the “unloved and undervalued” region for fresh gains.
Japan’s Government Pension Investment Fund (GPIF), which manages more than $1.2trn (£730bn) in assets, has plans to boost its weighting to domestic stocks from 12 per cent to 20 per cent, according to reports.
The pension fund has yet to confirm details of any changes but managers are expecting an announcement later this year.
Thomas Becket, chief investment officer at Psigma Investment Management, said: “This is massive news and will be a key pillar of support for Japanese equities. Investors should not underestimate GPIF’s influence.”
He added that the GPIF is a market leader and that other Japanese investors, especially institutional investors, tend to follow its lead.
Simon Somerville, manager of Jupiter’s Japan Income fund, said: “We expect domestic buying to continue as many NISA (Japanese individual savings accounts) investors that are still holding cash are now expected to invest into equities.”
If the GPIF does increase its weighting to domestic stocks from 12 per cent of its assets to 20 per cent, it would lead to nearly $100bn being pumped into the Japanese stock market.
Gavin Haynes, managing director of discretionary manager Whitechurch Securities, said such a move by the Japanese government pension fund would be “pretty aggressive”.
He said Japanese institutions have historically been “well behind the curve” and that it “takes them a long time to commit to equities”. He hoped the GPIF move would encourage other institutions to commit, “pushing the Japanese market up”.
When reports first surfaced about the GPIF’s intentions towards the end of Thursday’s trading, the Japanese Topix index jumped from being more than 0.5 per cent down on the day to being up by 0.5 per cent.
However, Mr Becket said that since then the market’s performance had been “disastrous”. The Topix index fell 3 per cent on Friday, according to data from Bloomberg.
“The fall in the markets has little to do with the news from the GPIF and more to do with the geopolitical background. People view the yen as a safe-haven currency and so are piling in, and equities perform inversely to the currency,” added Mr Becket.
He is overweight in Japanese equities but said he was prepared to buy more, becoming extremely overweight, if markets fall further.
Aside from the short-term boost from the GPIF news, Sam Perry, senior investment manager of Japanese equities for Pictet, said he expected Japanese corporate taxation levels to be a key driver for Japanese equity returns in the medium term.
He expects the tax level to be reduced by a few percent every year for the next four or five years, with an end goal of 25 per cent.
This will bring Japanese return on equity to a similar level as the US, according to Mr Perry, and will encourage more investors back into Japanese equities – still an underweight position for many investors.
‘Slow and progressive – that’s the Japanese style’
Investors who think the ‘third arrow’ of Abenomics – the growth strategy –has failed are making a fundamental error, according to Japan bulls.
Over the past 12 months, Japanese equities have underperformed, amid scepticism about prime minister Shinzo Abe’s reforms.
The trend in the markets is to be underweight in Japan. But Darius McDermott, managing director of Chelsea Financial Services, said that what the doubters have failed to appreciate is Japanese culture.
“They [the Japanese] tend to do things in bits and pieces. The structural change will come about as a result of smaller policies that the government has already started to put in place,” he said.
Thomas Becket, chief investment officer at Psigma Investment Management, agreed and said that in Japan changes are a “step-by-step” process.
“Japanese equities went backward slowly and then they switched to first gear and finally they are starting to move forward. Corporate reform is going to be slow and progressive, but that’s the Japanese style,” added Mr Becket.
Indeed, the very debate about whether or not Abenomics has failed should not matter to investors, according to Sam Perry, senior investment manager of Japanese equities for Pictet.
“There is real activity taking place in the corporate sector and it’s happening naturally,” he said.
