What happens after the historic sell off in Japanese equities earlier this month? What are some of the implications and long-term prospects for market actors in Japan?
Morningstar’s latest research assesses major trends that have contributed to change views on Japan in recent years, and their impact on the Japan equity universe. To keep it short: Japan equities are making a comeback. Experts are required to benefit from the ongoing return of assets story and its sequel: the return on assets story. These both create opportunities for active stock pickers, and we believe even more so for those who pursue constructive engagement, perhaps more so in the mid cap space.
Additionally, the report also highlights some funds like JPM Japan Equity that Morningstar sees as interesting options to gain exposure to this market.
“Investors are understandably cautious given recent market volatility, particularly in Japan where recent volatility soared. The notable shifts in market leadership between ‘growth’ and ‘value’ investments and a yawning gap between large vs. small caps have been evident. Yet, corporate governance reforms and evolving economic conditions present opportunities for unlocking long-term value. Benefits may be unevenly distributed in the years to come, while Japan’s lower market concentration offers ample opportunities for expressing investment convictions. Actively managed Japan equity portfolios, and particularly those with an active engagement approach, will serve a useful role within a broadly diversified portfolio. There is a medium term structural alpha story that will continue to play out in the coming years.” — Daniel Haydon, Manager Research Analyst, Morningstar
Key takeaways include:
- As long-term investors, we remain sanguine in the face of recent and extreme market volatility: there is a strong case for structurally drive long-term returns and idiosyncratic alpha.
- Corporate governance changes are tangible, but more progress is expected in the coming years, particularly in small and mid-caps. Structural change is truly afoot and improvements to shareholder returns will continue.
- A bifurcated market? ‘Value’ stocks have led the market in recent years while many ‘growth’ stocks have fared less well. Small caps have not kept up with large caps. The market rotation since 2022 has been violent– dispersion of returns in Japan equities has been high. This supports a blended approach for Japanese equity exposure, perhaps with a tilt towards value plays that are more exposed to corporate governance reform.
- Active management and engagement are expected to lead to outperformance. Japan will be a stock pickers market and specialists have a place in portfolios.