As land of the rising Sun shines, time for mutual funds to look East

Japan’s stock market is making history again. The Nikkei 225 on Friday hit a 52-week high of 38,865.06, tantalisingly close to its all-time peak of 38,915.87, which the Japanese market last saw 34 years ago. This, at a time when Japan’s economy ‘technically’ slipped into a recession and lost its world’s third-largest economy spot to Germany.

According to the Japanese government, the economy shrank at an annual rate of 0.4 per cent October-December after contracting 2.9 per cent in July-September. Two straight quarters of contraction are considered an indicator of a technical recession. During the past year, the Japanese market gave a return of 40 per cent and in five years, 80 per cent. However, in comparison, Sensex gave returns of 18 per cent and 102 per cent, respectively. The BSE Midcap returned 62 per cent and 181 per cent; and BSE SmallCap 63 per cent and 238 per cent, respectively.

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Leads over other indices

Among the global indices, Nasdaq index gave returns of 34 per cent and 111 per cent, respectively; DJ Industrial 15 per cent and 49 per cent; S&P-500 23 per cent and 80 per cent, respectively. Germany’s DAX gave 10.6 per cent and 50 per cent; and France’s CAC returned 5.7 per cent and 49 per cent.

China’s Shanghai produced a negative return of 11 per cent in one-year period and 2.20 per cent in last 5 years. Hang Seng gave a negative return of 21 per cent and negative return of 43.30 per cent; but Korea’s Kospi jumped 8 per cent and 18.75 per cent, respectively, in the last one-year and 5-year period; while Brazil’s Bovespa Index gave 16.3 per cent and 31 per cent, respectively.

This shows that Japanese market has done well in the last one year, beating major benchmarks and performing better compared with some of the developed markets and developing emerging markets.

Buffett’s push

One of the major reasons for Japanese markets to sparkle was the Warren Buffett’s stake buys in some prominent companies, including Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui and Sumitomo Corp. Besides Buffett, foreign funds, too, started to accumulate more Japanese stocks last year.

This altered the view on Japanese stocks as viable investment options, prompting foreign funds to increase their allocation to the market. Data compiled by Reuters said Japanese stocks accumulated about 6.3 trillion yen ($43.39 billion) worth of foreign inflows on a net basis in 2023, the biggest flows since at least 2014.

Analysts at Goldman Sachs, BlackRock, Citi, Daiwa Securities and Nomura continue to remain bullish on Nikkei for 2024 as well.

At a time when the market appears lucrative, there are only a few avenues for Indians to invest in Japan. To participate in Japan story truly, the only direct instrument available is Nippon India Japan Equity Fund. However, it has been underperforming its benchmark. Against S&P Japan 500 TRI one-year return of 19.91 per cent (as of January end), the fund earned return of 13.32 per cent. For 5-year period, it is 6.71 per cent against 10.03 per cent. One of the major reasons for the underperformance is exchange rate movement. The yen depreciated about 7 per cent each against Indian rupee and the US dollar.

Besides, there are a few global funds that invest a small part of their portfolio in Japan stocks.

May be time has come for Indian mutual fund fraternity to look East more closely and launch suitable products for domestic investors. However, investors should bear in mind that international funds, though they offer diversification, come with higher risks, including currency movements.

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