Japan regaining relevance in the equities market after 30 years of low growth adds to the excitement of Asia. At the same time, India’s economic backdrop and the current environment provide great investment opportunities.
At Nomura Investment Forum Asia 2024, Kwong Hong Huat, Head of Asia Total Return, Public Equities, GIC, and Vipul Mehta, Head of Asia ex-Japan Investment, Nomura Asset Management, shared their insights on growth, reforms and stock markets in Japan and India, respectively, in a session moderated by Arvind Shah, Head of Asia ex-Japan Equity Sales, Nomura.
Shah set the scene by explaining that of the approximately US$115 trillion in total global equities, the US accounted for 45-50% while Asia’s share was 25-30%. Japan as a market dominated equities in the late 1980s to early 1990s, but there has been a clear transition of asset allocation within global equities to the US over the past three decades, he said. Within Asia, Japan’s dominance gave way to China’s as the latter became the global supply chain leader over the past few decades. Asia offers a lot of diversity, he said, with Taiwan doing well over the last 10 years and India emerging as a market in the last five to seven years.
Japan is making a comeback, says Kwong Hong Huat
Asia is a growing market with both breadth and depth in equities that makes it a favorable hunting ground for both alpha generation and beta. With Japan regaining relevance in the equities market after 30 years of low growth, it adds to the excitement of Asia.
Japan’s rebound has been 10 years in the making, starting with Abenomics, the economic policies implemented by then Prime Minister of Japan Shinzo Abe in 2013. We are harvesting the results of the third arrow of Abenomics as Japan undertakes widespread corporate governance reforms and benefits from a new generation of corporate CEOs who are younger and more receptive to what investors want. The renewed focus on profitability and optimization of corporate balance sheets is structurally very good for the rerating of the Japanese stock market.
The other important thing that has happened in Japan is its exit from deflation of the past few decades. With the return of inflation, nominal growth has recovered and that is positive for equities valuations as well as pricing power of Japanese corporations.
We are still in the very early stages of change in Japan. Under the deflationary environment, Japanese households’ balance sheets were tilted towards cash, as they still are. Changes to asset allocation are not going to happen overnight, but it has started, prompted by government initiatives such as the revamped Nippon Individual Savings Account scheme.
Return on equity for the Japan market is also significantly below US and European levels, and it has the potential to catch up over time. There are some low-hanging fruits such as a reduction in cross-shareholdings that will allow this to happen though it will be a multi-year effort.
The changes taking place are not a repeat of the Junichiro Koizumi reforms in the mid-2000s or the start of Abenomics, which saw the market rally for two years and then fade. Given what the government is doing and the support for reforms, it will be a multi-year structural upturn.
From a bottom-up perspective, there are good companies that are reasonably valued and have good idiosyncratic risk-rewards. Investors are also talking about long-term themes such as digitization, green capex, reshoring capex, investment into artificial intelligence and corporate restructurings. So from a bottom-up perspective, the changes seem sustainable.
India is attractive as an investment destination, says Vipul Mehta
Asia offers a great investment opportunity over the next few years especially if mean reversion were to happen and money were to flow to this region from the US, which has been hogging all the attention over the last few years.
India’s economic backdrop and the current environment provide great investment opportunities. Historically it has been one of the best performing equity markets over any time period, alongside the US, and one of the most stable economies in the past 10 years.
The view of India as an expensive market and the historical perception that it is high-risk, high-volatility have kept foreign investors away over the past decade. That mindset still prevails among many foreign investors and there is a lack of recognition among them that India is the fifth largest economy and one of the largest stock markets in the world – with so many money-making opportunities, and sufficient liquidity and diversity. Domestic investors have reaped the benefits, seeing positive flow every year except one over the last 10 years .
Foreign investors will have to come back to India as it offers a unique opportunity in terms of size, economy, population and potential for growth. Last financial year, India recorded GDP growth of over 8%, exceeding growth rates in the US and China. It is expected to become the world’s third-largest economy by 2027, and its GDP is forecast to hit $7 trillion by 2030.
In 2013, India accounted for 8% of the MSCI Asia ex-Japan Index. Today it is about 19-20%, and foreign investors will at some point have to keep pace with the market and come back.
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