(Bloomberg) -- Foreign investors are looking to buy Japanese stocks as the market regains its footing after the steepest decline since Black Monday in 1987, said Bruce Kirk, chief Japan equity strategist at Goldman Sachs Group Inc.
“We were very concerned that the scale of the pullback could result in a pause of foreign investor interest, but that doesn’t seem to have taken place at this stage,” said Kirk, who’s been covering Japanese equities since 2001. “And if anything, I think the interest levels from certain parts of the foreign investor community have become noticeably higher.”
Investors should take advantage of last week’s correction to buy, as the latest selloff was more technical than driven by fundamentals, unlike during the 2008 global financial crisis and the 2011 Fukushima nuclear meltdown when there were social and systemic risks, the strategist said. There have been signs of foreign demand over the past few days, after the equity market last week slumped more than 20% from a record high reached in July, he said.
A turnaround in sentiment would provide a vote of confidence for a stock market that’s still down about 6% since the end of July, when the Bank of Japan set off a surge in the yen after raising its benchmark rate and unveiling plans to reduce bond purchases.
Investors outside the country were net sellers of Japanese equities for three consecutive weeks heading into the BOJ’s decision.
Part of the reason why so much overseas money flowed out of Japanese shares was because most of the funds were concentrated in a small number of well-known names, according to Kirk.
There are about 280 Japanese stocks that see over $20 million in daily trading activity, he said. Among those, there are around 50 that foreigners understand to a high degree and take large positions in, Kirk added. “A lot of people are running money in Japan with quite tight risk limits and when those risk limits are impacted, that tends to create even more selling,” he said.
All three of the Topix’s most heavily weighted stocks — Toyota Motor Corp., Mitsubishi UFJ Financial Group Inc. and Sony Group Corp. — had foreign ownership of at least 20% as of March, according to financial reports.
Goldman revised the Topix’s year-end target to 2,700 from 2,850, citing the short-term negative impact from the correction, but maintained its 12-month target at 2,900. The index closed at 2,600.75 on Thursday.
The investment bank has raised investment ratings for sectors in food, transportation and logistics, and pharmaceuticals. It recommends reducing exposure to cyclical sectors and increasing companies that rely on domestic demand.
“I don’t think we are out of the woods yet,” said Kirk. “Perhaps being more exposed to domestic demand drivers as opposed to global and cyclical drivers is the more defensive way of managing your portfolio.”
But stability in the yen should provide comfort for dollar-based investors of Japanese equities, according to Kirk, who said the yen’s current level probably doesn’t pose a risk to corporate earnings or estimates.
First-quarter earnings and upward guidance revisions are also causes for optimism, Kirk said. Plus a corporate governance report later this month from the Tokyo Stock Exchange may move the market, he added.
“They see Japan as down but not out,” said Kirk, referring to foreign investors. “We don’t think that the longer-term story has changed.”
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