Market Scramble: Foreigners buy Japan to play it safe
Leery of the West, investors seek solid profits in slower-rising Tokyo stocks
TOKYO -- Foreign investors are hunting for Japanese equities promising higher dividend payments, unsure of where the U.S. and other Western economies are headed and seeking steady returns.
The Nikkei Stock Average finished Monday at 20,067, closing above 20,000 for the first time in six sessions, despite the value of trading undershooting the 2 trillion yen ($17.9 billion) threshold to indicate sluggish activity. Mainstay stocks seemed to lack vigor, and shares known to pay high dividends held up the rally.
The rise was "surprisingly large," said Chihiro Ota, general manager for investment research at SMBC Nikko Securities. Ota had expected calmer movements, since a number of significant recent events had gone basically as predicted. These included the Bank of Japan's vote last week to maintain its monetary easing policy, as well as a victory in parliamentary elections for the party of France's new centrist President Emmanuel Macron.
Gainers included telecommunications infrastructure builder Comsys Holdings, which rose 1.7% to end at 2,384 yen. Electrical work provider Kandenko closed up 1.6% at 1,182 yen, while construction company Taisei added 2.3% to finish at 1,046 yen.
Comsys is getting more inquiries from foreigners, according to an investor relations official. The company targets a dividend payout ratio of 30%. The figure climbs to 70% when the value of stock buybacks is added. The expected dividend yield of 2.1% bests the average of 1.77% for components of the Nikkei Stock Average.
Yamaha Motor, which gained 0.8% to end Monday at 2,872 yen, has also set a target dividend payout ratio of 30% in its medium-term business plan through fiscal 2018. Its dividend yield comes to 2.26%. "Overseas investors weighing dividends heavily are buying Japan stocks," said Chisato Haganuma, chief equity strategist at Mitsubishi UFJ Morgan Stanley Securities.
In the first half of 2016, Japanese stocks accounted for around 3-4% of the portfolios of global funds that invest in equities around the world and attach great importance to generous dividends, according to U.S. investment research firm EPFR. But lately, the figure has climbed to around 5%. The Nomura Japan Consecutively Increased Dividend Stock Index has risen broadly since April, indicating that share prices have increased for companies repeatedly boosting those payouts.
Investors are wary that Western stocks may be riding too high. Germany's DAX index has gained around 10% since the start of the year amid optimism over an economic recovery in Europe. But "wage increases have not followed," said Kenichiro Yoshida, senior economist at the Mizuho Research Institute, so the economy "has not reached the point of a self-sustaining recovery." As a result, investors are turning more readily toward Japan, where equities have risen comparatively slowly over the period.
Investors settling on Japan stocks by process of elimination want to secure solid yields and are taking a cue from companies' stances on shareholder returns. Thanks in part to the introduction of corporate governance standards, Japanese businesses incorporating payout ratios into their medium-term plans are on an upward trajectory.
One "could even say there's room to raise dividends further," Haganuma said. While Japanese dividend yields are lower than their Western counterparts, the gap is now closing.
Whether foreign "dividend hunters" will translate into a sustained rise for Japan equities is unclear. Even some companies increasing dividend payouts appear overvalued, based on such indicators as price-earnings ratios.
Net profit for listed Japanese companies is expected to reach an all-time high this fiscal year. To lure investors to a broader range of shares, businesses will need to apply these earnings toward growth strategies as well.