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Analysis: Japanese stocks catch global investors' eyes as post-COVID growth play

TOKYO/SYDNEY (Reuters) - Japan’s traditionally overlooked stock market is winning new fans as global investors use the promise of a coronavirus vaccine and a new U.S. administration to hunt for more fairly valued, growth-oriented markets.

FILE PHOTO: A man wearing a protective face mask walks past a screen displaying a graph showing recent Nikkei share average outside a brokerage, amid the coronavirus disease (COVID-19) outbreak, in Tokyo, Japan November 2, 2020. REUTERS/Issei Kato

The Nikkei stock average .N225, historically an underperformer, has jumped to its highest in almost 3 decades and has become one of the developed world's top performers in the week since Democrat Joe Biden won the Nov. 3 U.S. election.

Investors are betting that a less fractious global trade policy under Biden and a COVID-19 vaccine will lead to a stronger economic rebound and higher bond yields.

As a result, many investors are now rotating out of “growth” stocks that comprise defensive, fast-growing sectors such as technology into those more attuned to fundamental economic strength.

That puts Japan, with its staple of consumer and industrial blue-chips, firmly in their cross-hairs.

“We feel that Japan is becoming very interesting again,” said Patrick Ghali, managing partner of hedge fund advisory firm Sussex Partners, which is recommending increased allocation.

“It feels like it’s the last fundamental place left, if you look at valuations.”

Even before the pandemic, some foreign fund managers were turning optimistic on Japan, which is often avoided because of corporate cash-hoarding and anaemic growth.

Those cash piles now look more attractive, as strong balance sheets spell steady dividends and more acquisitions.

In August, after years scouring the globe for a big purchase, legendary investor Warren Buffet splashed $6 billion on 5% stakes in each of Japan’s old-world trading conglomerates.

“For Japan, you get a developed market, you get the best dividend growth of any developed market and you’ve also got a market with a big chunk of earnings coming from outside of Japan,” said Jim McCafferty, joint head of Asia-Pacific equity research at Nomura Securities in Hong Kong.

Shares in Japan's two biggest car manufacturers, Toyota Motor 7203.T and Honda Motor 7267.T are at multi-month highs after the firms doubled operating profit forecasts, due to a recovery in demand from China, which highlights an economic decoupling from the West that Nomura's McCafferty says makes Japan appealing.

Graphic - Japanese stocks - historic underperformance:

A YEN FOR THE NIKKEI

The Nikkei hit a high of 25,401.30 this week and is up 55% since its trough in March, getting a big lift after positive results from Pfizer Inc's PFE.N coronavirus vaccine trial.

Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, sees it at 26,000 early next year. Among the more bullish forecasts, Tokyo-based Monex Securities expects an 8.5% rise to 27,500 by March.

The surge in Japanese stocks this year has stumped many investors because it coincided with the yen's rise JPY= to an eight-month high versus the dollar, showing the market was increasingly less reliant merely on exports.

Graphic - Yen and Nikkei:

Japan’s government has been pushing companies to improve corporate governance, and the decades-long effort is starting to yield results as boards agree to give investors higher returns.

Dividend yields in Japan are around 2.8%, higher than 2.2% in the United States and on par with the 3.0% dividend yield for many emerging markets, according to Schroders.

“It should be noted that in previous global recessions, the profit recovery for Japanese corporates has always been a ‘V’ and we wouldn’t doubt this time will be different,” analysts at securities firm Jefferies said in a note last week.

Still, with so much hinging on the recovery from the pandemic, forecasts for the Nikkei are being revised up cautiously and gradually. Any setback in the development of a coronavirus vaccine will knock equities lower, Fujito warns.

Reporting by Stanley White in Tokyo and Tom Westbrook in Sydney, additional reporting by Eimi Yamamitsu in Tokyo; Editing by Vidya Ranganathan and Kim Coghill

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