TOKYO -- Although high-growth sectors linked to domestic demand are again enjoying the attention of investors in Japanese stocks after driving a rally this past spring, their popularity now comes amid fears of downside risks rather than optimism.
Atsushi Seki of Barclays Securities Japan is somewhat baffled by the performance of Ono Pharmaceutical, which set consecutive post-listing highs along its 40% upswing since the end of September. "I struggled to explain why it was bought up so high" to U.S. investors, he said.
While there is a clear buying incentive -- a strong start to sales of a cancer-fighting antibody treatment developed with an American drugmaker -- Ono's projected price-earnings ratio of around 160 is an outlier in the industry. The company's market capitalization has swelled by about 1 trillion yen ($8.1 billion) this year to put it in third place among drugmakers, behind Takeda Pharmaceutical and Astellas Pharma.
Shares in Shionogi, which is developing a one-day flu treatment, have jumped 30% since the end of September. The Nikkei Stock Average's pharmaceutical-sector index advanced for 15 straight trading days through Wednesday on the back of Ono and Shionogi. Pfizer's massive deal to acquire Allergan comes amid concern about blockbuster drugs going off-patent and a scramble to find new candidates.
As Toyota Motor and other blue chips languish, investor money is flowing to more areas than just the pharmaceutical industry's new-drug bubble.
Among retailers, drugstore operator Sundrug, which expects to report record black ink for fiscal 2015 on a rise in foreign tourists, has climbed 27% since the end of September. Recovering monthly sales at apparel retailer Shimamura helped push its shares up 13%. In the food industry, the rising popularity of Japanese cuisine has lifted the overseas growth of such companies as Kikkoman, whose stock has jumped 24%. All three are expected to enjoy strong growth while maintaining a stable earnings foundation.
Such domestic-demand growth stocks led the Nikkei average's rally toward 20,000 in the first half of the year. As the benchmark index advanced 10% between January and March, the pharmaceutical-sector index grew 28%, faring the best among the 36 sector indexes. The food index rose 17% amid expectations of a boost from price hikes, while retail climbed 16% thanks to foreign tourism.
With the market having regained momentum, investors are flocking to these three sectors again. The Nikkei average is back on the verge of reaching 20,000. But this does not prove that investors are feeling bullish.
The external factors at work are very different from those in early spring: concerns about China's slowing economy, uncertainty about the situation in the Middle East, and a looming U.S. interest rate hike. Amid the market's smooth futures-led rise, "many investors have started bracing for downside risks," said Norihiro Fujito of Mitsubishi UFJ Morgan Stanley Securities.
Pharmaceuticals are one industry whose environment "hasn't changed much," said Kazuaki Hashiguchi of Daiwa Securities. The field's appeal as a defensive play, in addition to high hopes for new drugs, makes it look doubly attractive.
The focus on companies with both high growth and stability seems to stem from a process of elimination as investors prepare for downside risks while ensuring that they do not miss out on the rally. The preference for domestic-demand-linked growth stocks that had demonstrated investor optimism in the spring now seems to be the flip side of investor uncertainty.