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Stocks

Market Scramble: Growth stocks may pick up where Trump rally leaves off

Relatively high price-to-book multiples aren't holding back some Japanese shares

TOKYO -- Many in the Japanese stock market were probably disappointed that U.S. President-elect Donald Trump failed to mention any economic polices in his much-anticipated news conference Wednesday.

Yet some took the omission positively, happy there was nothing in the occasion to pour cold water on general bullishness. This may give investors who failed to hop on the so-called Trump rally a second chance.

"Domestic institutional investors who missed the bus are desperate to catch up," said a trader at a major brokerage. But latecomers will have a hard time finding underpriced stocks, now that the benchmark Nikkei Stock Average has gained roughly 2,000 points since the U.S. election.

Instead, these investors seem to be pinning their hopes on growth stocks -- shares of companies that are expected to increase earnings substantially.

Sekisui Chemical topped its 2016 peak and hit a year-to-date high for 2017 Thursday, when about eight in 10 names on the Tokyo Stock Exchange's first section lost ground. The plastics manufacturer, which is up 4% this year, was buoyed by Goldman Sachs Japan's "buy" rating. "High-performance plastics, chiefly interlayer films for automotive glass, for which the company boasts a world-leading share, will drive profit growth for the next five years," said Goldman's Shuhei Nakamura.

Amano, S.T. Corp. and Sony also rose Thursday to their highest since the start of 2016 and have advanced 9.5%, 8.7% and 7.9% this year, respectively. (By contrast, the Nikkei Stock Average has edged up 0.1%.)

They are among a group of gainers in the new year that also includes Yaskawa Electric and Recruit Holdings. All are trading at relatively high multiples of book value -- ranging from 1.5 to 3.9, compared with an average of 1.3 for the Nikkei 225 -- so buyers must anticipate further growth in earnings.

The Topix Growth index, comprising shares with high price-to-book ratios, underperformed the Topix Value index of lower-multiple stocks through the end of last year. But as the broader market lost upward momentum after the turn of the calendar, the tables turned.

2017 may see "the arrival of market that favors growth stocks," predicted Akihiro Murakami at Nomura Securities. The inauguration of a U.S. president or congressional approval of an economic stimulus package tends to be preceded by a value-stock rally, in Murakami's analysis. But buying generally shifts to growth stocks after the new leader takes office, he said. In other words, history indicates that investors should be buying growth stocks not because it isn't too late, but because now is exactly the right time.

Even after Trump's news conference, the bullish outlook on stocks hasn't changed, said Naoki Fujiwara at Shinkin Asset Management. Experience suggests that the first stage of the Trump rally -- which was driven by the president-elect's remarks, for better or worse -- is winding down. Investing for growth. i.e., the long haul, may offer those who missed out the first time another opportunity.

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