(Bloomberg) -- Japanese stocks are set to beat their U.S. peers for the first time in almost two years amid a global shift to shares with low valuations.
The Topix is up 4.7% this quarter through Thursday, beating a 1.2% gain for the S&P 500 index. It's the first outperformance since the last quarter of 2017. The Japanese benchmark gauge was trading at about 13 times estimated 12-month forward earnings, compared to about 17 times for the S&P 500.
“Japanese stocks underperformed for a long time and their valuations were left as very cheap,” Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management Ltd. in Tokyo. “A correction in cheaper valuation stocks have occurred globally and Japanese stocks are the most prominent example for that.”
September has been good to the Topix, which is set for its best month since October 2015. Up until late August, the gauge was one of this year's worst-performers among the 24 developed markets tracked by Bloomberg.
Norihiro Fujito, the chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, says Japan's market is enjoying a “a typical return reversal.” Foreign investors may be taking profit on U.S. equities, while covering short positions on Japanese shares, he said.
Foreigners net bought 937 billion yen ($8.7 billion) of cash equities and futures in the week ended Sept. 13, according to Japan Exchange Group data. That was the fourth consecutive week of net buying.
Still, Japan's winning streak isn't guaranteed to last, as the nation prepares to raise its sales tax 2 percentage points to 10% next month even as its economy remains weak, according to Matsumoto and Fujito. Moreover, there's a low chance that the U.S. and China will reach a major trade agreement, Fujito said.
“Japan's economic fundamentals are worsening and also the sales-tax increase is ahead,” Fujito said. “Once short-covering runs its course, there's a risk that Japanese stocks may turn to decline.”
--With assistance from Ayaka Maki.
To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net
To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Naoto Hosoda, Tim Smith
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