Japanese investors favour foreign equities despite Nikkei's record highs

Japanese favouring foreign equities: Japanese investors are showing a preference for overseas equities over their domestic stock market, despite the Nikkei's recent surge surpassing bubble-era highs. This hesitation stems from concerns about sustained corporate returns and memories of the 1990s market crash.

Instead of investing in their home market, Japanese investors are increasingly directing funds towards foreign equities, particularly attracted to the promising prospects of US stocks, including the tech sector, and emerging economies like India.

Domestic vs foreign

In terms of figures, data from Morningstar reveals that Japanese equity funds focusing solely on domestic markets received a modest $1.2 billion in January, contrasting sharply with the substantial inflow of $7.8 billion into funds targeting foreign investments.

Breaking down the foreign investment focus, US-focused equity funds received the lion's share at $3.8 billion, followed closely by broader global equities with $3.1 billion. Indian equity-focused funds also saw a notable influx of $763 million during the same period.

The importance of this trend lies in the need for a domestic bid to sustain the Nikkei's uptrend following a rally primarily driven by foreign investors. Japanese households, holding approximately $7.7 trillion in cash and deposits according to Bank of Japan data, possess the potential to significantly impact the Nikkei. However, they currently allocate only 13 per cent of their assets to equities, notably lower than the US (40 per cent) and Europe (21 per cent).

Japanese market participation

Despite the Nikkei index slightly retreating from its recent record high, after a prolonged rally supported by factors such as cheap valuations, corporate reforms, and diverted investment flows from China, there's a call for reassurance that Japanese individual investors are actively participating in their own market.

Wei Li, a portfolio manager at BNP Paribas Asset Management, stressed the importance of shifting household assets from deposits to equities, a goal facilitated by the Nippon Individual Savings Account (NISA) programme. This Japanese government initiative aims to encourage individuals to invest in the stock markets by providing tax-free benefits.

Li also highlights that the strong performance of the Japanese market compared to global peers is expected to encourage more individual investors to allocate funds to their home market over time.

(With Reuters Inputs)