The 9.0-magnitude earthquake that devastated Japan will also likely leave buying opportunities in its aftermath, even as certain economic indicators are pointing in the opposite direction.
“We haven't seen Japanese stocks this cheap in a long time,” said Virginie Maisonneuve, head of global and international equities at Schroder Investment Management Ltd., London. “They looked quite attractive before (the earthquake) and prices became just absurd afterward. We think it's a fantastic buying opportunity.”
While Schroders is still generally underweight Japan relative to global benchmarks, portfolio managers have continued reducing the underweight position within 2 percentage points of the global benchmarks used in various active equities strategies. In comparison, Schroders was as much as 6 percentage points underweight prior to the 2008-2009 financial crisis. Schroders manages about £26.6 billion ($43 billion) in global equities strategies, part of its £201.4 billion in total assets under management as of March 31.
The consensus view places much uncertainty in the short term because of recovery efforts and in the long term because of unresolved structural problems. But the value of Japanese stocks could have reached a floor in the sell-off immediately after the March 11 quake and tsunami and are poised for a sustained rebound, managers said.
Furthermore, the Japanese equity market generally benefits from expected global growth because of its export-led economy and will also stand to gain if the dollar strengthens against the yen, as some predict.
However, others argue that the low pricing clearly reflects problems that have left Japan as arguably one of the most unloved stock markets in the past decade: high sovereign debt and low domestic growth; a rapidly growing percentage of people over 65; and ineffective government intervention policies, sources said.
Japan's economy has been shrinking in terms of global market capitalization, and was overtaken by China last year. Japan's weight within the MSCI All Country World index, which combines developed and emerging markets, was 7.9% at the end of the first quarter compared to 10.5% 10 years ago.
“These long-term challenges for Japan have mostly been priced into valuations,” said Patrick Moonen, The Hague, Netherlands-based senior strategist for equities in ING Investment Management's strategy and tactical asset allocation team.
On top of that, the earthquake, tsunami and subsequent problems at the Fukushima nuclear power plant damaged an already weak economy at a time when the global outlook — particularly in emerging markets — is less buoyant and inflation concerns are rising.