December 14, 2016 4:40 am JST

Market Scramble: Off-the-beaten-path stocks may be the way to go

Unpopular shares could deliver surprising results

TAKENORI MIYAMOTO, Nikkei staff writer

TOKYO -- While most investors in the Japanese market are snapping up financial and cyclical stocks on hopes for interest rate hikes and stimulus measures in the U.S., some contrarians are challenging the consensus, preferring issues that remain off the radar.

Tokyo stocks climbed again Tuesday, sending the Nikkei Stock Average up 95.49 points to 19,250.52, a fresh high for the year. Investors are no longer wondering whether the U.S. Federal Reserve will hike rates at its two-day meeting ending Wednesday, and instead debate how many increases to expect next year. A widening interest spread between the U.S. and Japan will weaken the yen further, they reckon.

If President-elect Donald Trump's stimulus works, the pace of rate hikes will pick up, James P. McCaughan, CEO of Principal Global Investors, said.

Investors apparently agree with this view. Stocks bought after the U.S. presidential election through the first week of December were mostly low-priced issues with a low return on equity and slow operating profit growth, shows a statistical analysis of shares listed on the Tokyo Stock Exchange's first section. These include exporters hit by the yen's strength earlier this year and financial institutions weighed by low interest rates. Trump's economic proposals have sparked hopes for a revival of these sectors.

But some investors beg to differ. "As early as July, the climate will become such that U.S. rate cuts will be called for," Kenichi Hirayama, asset management strategy chief at Tokio Marine Asset Management, said in all seriousness when asked to give a 2017 outlook. Trump's economic policy will soon hit the wall and this will cool business sentiment, projected Hirayama, a 25-year veteran who was one of the first to foresee a rebound in energy prices.

Long-term holdings of stocks seldom owned by institutional investors -- unpopular issues -- historically deliver higher returns than professionals' popular favorites, show data measured by Masataka Kurita at Credit Suisse Securities (Japan). Attention should be paid in particular to their performance during wild market swings, Kurita said, explaining that less-liked stocks tend to stay resilient during a market decline. They also often rise on surprise factors and perform well during a market upturn, he noted.

An investing approach that does not follow the pack sometimes causes pain. "If my portfolio doesn't include so-called Trump stocks and it underperforms the market significantly, I'll be grilled by my supervisors and customers at monthly report meetings," said a portfolio manager at a domestic asset management company. This is one reason investors are snapping up banking stocks, which had remained unpopular as being part of a structurally struggling sector.

Investors confident about short-term trades may reap big profits in the ongoing rally. But with poor judgment skills, they could be swamped by the market. Some gains may be attained only by investors who have endured a pain.

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