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February 16, 2024

Friday Facts: Equity Japan – A Rally Without Investors?

by Detlef Glow.

The bull market driven by the Magnificent Seven was obvious to market observers and investors over the course of 2023. But there was another bull market which has been somewhat ignored by European investors—Japanese blue chip stocks.  While the Nikkei 225 TR gained 18.42% (in EUR) over the course of the year, Europe-domiciled mutual funds and ETFs classified as Equity Japan gathered only 1.1 bn EUR of estimated net inflows. Given the fact that Equity Japan can be considered as one of the core asset allocation building blocks, the relatively low inflows into Equity Japan are somewhat surprising, especially as a number of prominent portfolio managers and economists have forecasted a bull market in Japan in public.

That said, it looks like European ETF investors have embraced the Japanese bull market in their portfolios since ETFs classified as Equity Japan enjoyed estimated net inflows of 3.9 billion EUR, or 4.25%, of the overall flows in equity ETFs in the European ETF industry over the course of 2023.

Graph 1: Performance Nikkei 225 TR (in EUR) and Estimated Net Flows 01.01.2023 – 31.01.2024 (in bn EUR)

Performance Nikkei 225 and ETF flows in Equity Japan

Source: LSEG Data and Analytics

Nevertheless, it looks like European ETF investors do underweight Japan in their portfolios, since the assets under management in ETFs investing in Japanese blue chips do only account for 35.2 bn EUR, or 3.12%, of the overall assets under management invested in equity ETFs in Europe. This percentage is way below the weighting of Japan in standard global equity indices. Nevertheless, Equity Japan is the eighth largest Lipper global classification for ETFs in Europe.

Graph 2: Nikkei 225 CR 31.08.1984 – 31.01.2024 (Month End Values – in JPY)

Source: LSEG Data and Analytics

But why have European investors in general somewhat ignored the rally in Japanese blue chips? From my point of view one reason for this might be the fact that investors have hear the story of the rebound of Japanese stocks too often and may have thought, this is just another time where valuations in Japan look attractive, but the performance of the respective stocks might become once again a disappointment. But this time seems to be different since the Nikkei 225 is chasing its all-time high despite some economic headwinds.

 

The views expressed are the views of the author and not necessarily those of LSEG.

This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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