What’s going on here?
Investors drastically reduced their holdings in Japan-focused equity mutual funds in May, signaling a loss of confidence as the market’s prolonged rally hit a roadblock.
What does this mean?
Japan’s stock market had a stellar 17-month rally that saw the benchmark Nikkei rise by about 30%, peaking in March before slipping into a months-long range. According to LSEG Lipper, this shift in market sentiment prompted huge outflows from both domestic and global funds that predominantly invest in Japanese stocks, totaling $7.2 billion in May – the highest in eight years. Specific funds bore the brunt, with the Nomura NF Nikkei 225 ETF and Nomura NF TOPIX ETF seeing outflows of $2.07 billion and $1.28 billion, respectively. The market’s hesitation is partly due to potential interest rate hikes and profit-taking behavior, compounded by political instability as Prime Minister Fumio Kishida’s support hits a low since 2021.
Why should I care?
For markets: Shifting sands in Asian markets.
While Japan struggles with outflows, other Asian markets are benefiting. Indian equity funds recorded inflows of $2.41 billion in May, totaling $24.65 billion for the year, while Chinese equity funds pulled in $1.1 billion, bringing their year-to-date inflow to $46.88 billion. This repositioning suggests that investors are looking for more attractive growth opportunities elsewhere in Asia.
The bigger picture: Valuations and volatility.
The MSCI Japan index trades at 15.4 times forward P/E, above its 10-year average of 14.1 and the broader MSCI Asia Pacific index’s P/E of 14.03. These higher valuations make Japanese stocks less compelling amid economic and political uncertainty. Coupled with slowing inflows, investors might be cautious until markets stabilize and valuations become more attractive.
