It's been a disappointing year for equity investors in Japan, where stocks have underperformed other developed markets significantly in 2021. But that may be set to change in 2022, with the Japanese central bank one of the very few expected to remain very dovish throughout the year.
"All Stars Aligned," the investment bank Jefferies says of Japanese markets going into next year. "By August 2021, the degree of Japan underperformance vs. both the U.S. and Europe had reached unsustainable levels," with relative valuations at a 20-year trough. Meanwhile, Japanese earnings are some of the strongest in the world, often "record-high beats."
Year to date, there's been a gain of 9.9% for the broad Topix index, which covers all shares in the First Section of the Tokyo Stock Exchange. The Nikkei 225, greatly influenced by Japanese multinationals and major exporters, is up just 4.8% so far this year, with just over a week left to trade.
That's in contrast to the 25.6% gain in the S&P 500, in an unusual year where the normal FAANG suspects have not beaten the world. The Nasdaq composite has been impressive, up 20.8%, but lagging the broader market slightly. Smaller-caps benefitted from larger interest. The big-cap dominant Dow Jones Industrial Average is up 17.4% so far in 2021.
Japan has also underperformed Europe, a laggard in recent years, with France's CAC 40 up 24.6% and the DAX in Germany advancing 16.6%. Even battered Britain, beaten up by problems over Brexit and now a dramatic surge in Omicron cases, has outdone Japan, with the FTSE 100 up 11.0% year to date.
It's been a disappointing year in Asia in general. Taiwan led the way, its chip-dominated market up 19.6%. India was an early leader but has flagged, the Sensex now advancing 18.5% for 2021, having lost 8.2% since mid-October. Other than that, very few markets even made it into double digits.
There have been two recent moves higher in Japan, with a rally in early October that collapsed by the start of this month. There's now been a mild 2.3% gain since December 2 but it could lead into something stronger and more sustained in 2022, when most markets are heading south. At the very least, a Japanese market with strong support from the central Bank of Japan will be a very solid holder of value.
That first attempt at a rally ended when Japan held elections on October 31. New Prime Minister Fumio Kishida was greeted with a load "Mmeh," seen as an uninspiring backroom politician likely to be pushed by the power brokers from the various factions that bicker inside his Liberal Democratic Party, which has ruled virtually unbroken since World War II.
But the elections and last summer's Olympics (remember them?!) are long gone. Both domestically-oriented companies and Japanese exporters are revising earnings strongly upwards. Some 37% of the Topix members are still below their pre-Covid levels, as opposed to 29% in Europe and just 18% in the United States.
The last time Japan was at such a discount to developed markets, in July 2020, its stocks outperformed DM peers by almost 10 percentage points, Jefferies calculates. Japan's fiscal year ends at the end of March, and the September through April stretch is the strongest period to hold Japanese equities. The expected rally has yet to come.
There are 10 interesting plays that I'll pull out of the Jefferies year-ahead look for Asia. I think these 10 companies all stand to gain from Covid, but should be well-poised to benefit from a rally in Japanese equities and any recovery in growth, too.
One interesting way of playing the Covid recovery in Japan is through staffing companies. Business-process outsourcing is an ongoing trend in Japan, and any rush back to the office is sure to create a squeeze on getting enough warm bodies in the door.
Persol Holdings (T:2181) and (TEMPF) and TechnoPro (T:6028) and (TXHPF) are the top Jefferies picks, gaining as temp-staffing posts are increasingly filled remotely. TechnoPro is focused on information/technology staffing, while Persol has a more general focus. The company Atrae (T:6194), which operates several job-related Web sites such as Green and Wevox, also stands to gain.
The pandemic expanded the fan base for anime, the Japanese manga and movie comic style. The anime-devoted subscription service Crunchyroll surged past 5 million paid subscribers in August, six months after it broke through 4 million, with 120 million registered users worldwide and 60 million followers on social media. Much of that interest is expected to stay sticky if and when the pandemic ever ends.
Investors can play the interest in anime through movie studio Toho (T:9602) and the media conglomerate Kadokawa (T:9468), both of which hold significant animation intellectual property, which they license.
"We believe 2022 will be a year to focus on the organic growth stories of 'with-pandemic' stocks," Jefferies analyst Shinnosuke Takeuchi says in identifying ways of playing new styles of work and play. There may a longer-term drive to "stay home" in Japan, while "we believe 2022 will be a year for confirming the 'new normal' Japanese lifestyle after the pandemic."
Covid vaccine plays would be another sensible way of playing any 2022 stock recovery. JCR Pharmaceuticals (T:4552) is booking record profits off its manufacturing of the AstraZeneca (AZN) vaccine in Japan. Takeda Pharmaceutical (T:4502) and (TAK) is soon going to start making the NovaVax recombinant vaccine. Shionogi (T:4507) and (SGIOF) is developing a recombinant vaccine of its own, while Daiichi Sankyo (T:4568) and (DSKYF) is worth watching as it develops its own mRNA vaccine. These companies are large and strong enough to justify selection even without the very strong Covid boost they receive.
Lastly, to play the "metaverse," look no further than Sony Group (T:6758) and (SNEJF) . Gamers still can't get their hands on a PlayStation 5, more than a year after the next-gen gaming console's release. Here in Hong Kong, I finally fronted up and bought a "parallel-import" Japanese model for, well, a lot more than I expected - the equivalent of US$755 instead of its US$408 retail price. I wanted it for my kids (and myself) last Christmas, let alone this, and there's no hint that supply is going to ease at all through the course of 2022.
Nevertheless, the PS5 is the fastest-selling console in Sony's history. Its "haptic feedback" controllers are groundbreaking while its processing speeds are superfast, allowing for some stunning graphics on PS5-specific games like Returnal. It's stunning to play, like something I've never seen in a game.
Sony will have a profit driver there for several years to come, with a rising number of studios in its stable making games. A lot of games have been pushed into 2022 due to the pandemic making life hard for the "devs," meaning next year should be exceptionally strong. Perhaps that's why we see many tech companies in other spheres such as Apple (AAPL) , Alphabet (GOOGL) , Amazon (AMZN) and Netflix (NFLX) muscling in on the gaming industry.
"Sony is exceptionally well-positioned," Jefferies interactive-entertainment analyst Atul Goyal concludes. The company offers the best growth among its peers over the next 2 to 3 years, with strong prospects for the next decade, too.