Rethinking Japan: Missing the alpha for the beta?

CONTRIBUTORS

Hsung Khoo

Portfolio Manager, Research Analyst,
Templeton Global Equity Group

Preview

We are now three years into a regime change for Japanese equities and global investors are taking notice. The normalization of the Japanese economy after over three decades of deflation is firmly on track and the corporate reform movement is now entrenched. As global investor appetite for Japanese equities picks up from near decade lows, perhaps it is an opportune time to review the investment paradigm for Japanese equities going forward.

The consensus view for well over the past decade has been that Japanese equities was essentially a proxy to the global economic cycle or a beta play. This view appears reasonably supported by the fact that around 60% the TOPIX benchmark were companies with significant earnings from overseas¹ while corporate earnings from the domestic economy was dulled by chronic stagnation and pervasive deflationary sentiment.

However, data from SPIVA (S&P Indices versus Active) research challenges us to reconsider the consensus perception of Japanese equities as a beta market. The data strongly suggests that the Japanese equities market stands out as one of the most attractive destinations for alpha generation. Over the past 15 years, 22% of active equity managers outperformed the benchmark in Japan.

This contrasts with 11% for the US and 8% for Europe (see Exhibit 1). From this perspective, Japanese equities stand out as a relatively attractive source of alpha for global portfolios.

Exhibit 1: Share of funds outperforming benchmark over last 15 years

Source: SPIVA, S&P Global. As of end December 2024. Past performance is not an indicator of future results.

The sun is rising in corporate Japan again. The regime changes are re-shaping the arc for Japanese equities going forward; one that contrasts with the one that global investors have become accustomed to over the past three decades. It is time for investors to reconsider active management in Japan for a unique source of alpha for global portfolios.

Source: Franklin Templeton research, TOPIX. The TOPIX is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.

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