TOKYO -- Though selling by overseas investors has contributed to Japanese equities' poor showing of late, the trend is no longer so uniform, with some now seeing a chance to cheaply snap up stocks whose earnings have benefited from reform.
Foreigners sold 54.9 billion yen ($495 million) more in Japanese shares than they bought over the trading week through last Friday, Tokyo Stock Exchange data released Thursday shows, marking a seventh straight week of net selling. The trend owes partly to a slump in U.S. equities and concern about political risk.
Overseas investors "have continued to unload automotive and financial shares bought during the Trump rally," said Ryoma Sugihara of Societe Generale Securities, referring to a broad-based rise in stock prices after Donald Trump's U.S. presidential election victory in November. Toyota Motor retreated a third straight day Thursday, with its price-to-book ratio falling to just above 1.
But a closer look at the data reveals a shift in behavior. Net selling of cash stocks by foreigners peaked at 406.9 billion yen in the third week of March, while buying jumped 30% on the week to roughly 8 trillion yen in the trading week through last Friday. Foreign investors became net buyers of Nikkei average futures for the first time in four weeks that week.
Stock-picking based on such long-standing themes as factory automation is still going strong, said Basil Dan of Credit Suisse in Tokyo. Tsugami, which is enjoying a steady flow of Chinese orders for precision machine tools, hit year-to-date highs Wednesday and Thursday.
The dollar-denominated Nikkei average, a benchmark watched by such investors as foreign pension funds, topped $170 for the first time in 17 years in late January and remains in the $168 range. It has gained 3% this year, compared with a 3% drop for the yen-denominated index.
This rise means that foreign investors have not been hit has hard as might be expected by the market's gyrations from the Trump rally. Japanese stocks' underperformance compared with American and German markets is "not so bad that [investors] will significantly reduce their allocations," said Norihiro Fujito of Mitsubishi UFJ Morgan Stanley Securities.
To maintain their weightings of Japanese stocks, investors must find alternatives to buy with the proceeds from the recent selling of such holdings as automotive shares. A Goldman Sachs Japan survey of overseas funds investing in Japanese shares found higher-than-average holdings of such names as Keyence and Sony -- companies that boast unique technology or are affected relatively little by a stronger yen.
But this trend is largely limited to reshuffling portfolios. Whetting foreigners' appetite for long-term investing will require progress on governance reform and a recovery in domestic consumer spending, said Kazunori Tatebe of Goldman Sachs Japan.
Kobayashi Pharmaceutical, for example, expanded the ranks of its outside directors in 2016 and has seen its shares rise 20% over the past year. "It focused on governance to the point of weakening the powers of" the founding family, said Kenji Iwamoto of Governance for Owners Japan, the Japanese arm of a U.K. investment advisory firm.