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What's Up in Japan | 1Q21 Review

Updated: Apr 29, 2021

Q1 is a wrap. A good riddance to fiscal year 20.

For those of you who shifted out of high-flying growth stocks and rotated into deep value, congratulations.

In Q1, Japanese equities marked an impressive performance. The Nikkei rose +8.3% and Topix climbed +6.3%. The 7% decline in the yen did eat away most of those gains for offshore investors though.

The strong topline numbers, however, belied a difficult quarter for stock pickers. Higher interest rates caused a brutal rotation out of growth and into value. Last year’s unloved stocks, particularly those trading below Book Value, suddenly could do no wrong. On a sector level, the big winners included Shippers (+37%) and Steel (+32%).

Last year’s darlings, small cap “tech” stocks in the TPX Mothers, barely eked out positive gains. Even within small caps, investors shifted from growth to value, causing a significant 7% spread between Mothers and the TPX Small Index.

We break out the winners and losers in the following chart:

Japan is a great hunting ground for value stocks and is arguably the biggest beneficiary of rising inflation expectations. Not surprisingly, Old school Japan had a great quarter - Office Equipment (Ricoh +66%; Konica Minolta +45%), Industrials/Autos (Mitsui Engineering +59%; Mitsubishi Motors +52%, Hitachi Zosen +57%; JTEK +41%) and commodities plays (Nippon Yusen +57%, Showa Denko +43%, Nippon Steel +42%). Some of the duds included M3 (-22%) and Z Holdings (-12%).

As we bid farewell to Q1, it will be interesting to see if Value continues to outperform Growth. Much probably depends on the bond market. A further ratcheting higher of yields could continue to weigh on still high valuations in the growth space. However, the major global mega trends are not going away. Decarbonization, Data, Automation, and AI, to name but a few, remain powerful forces. Whether that shift back to growth happens this quarter, or later, we think that Japan’s smaller, more agile, tech-savvy small caps offer better long-run return than the “old” value stalwarts.

We see plenty of reasons for optimism.


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