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Japan's Economic Surge: Evarich Asset Management Rides High on Bank and Construction Sector Investments


Leo Gonzalez

March 21, 2024 - 23:19 pm


Evarich Asset Management Boosts Stake in Japanese Banks Amid Economic Optimism


(Bloomberg) -- In a striking move of confidence, Evarich Asset Management, a seasoned player in investment circles, is setting its sights on amplifying investments within Japan's financial and construction sectors. This decision follows on the heels of the Bank of Japan's historical step away from its long-standing negative interest rate policy—a move that could herald a new chapter of profitability for these industries.

Yutaka Uda, President and Chief Investment Officer of Evarich, Tokyo, sees a newfound attractiveness in the nation's lenders. With the Bank of Japan raising rates for the first time in almost two decades, the anticipated widening of loan margins spells a positive outlook for banks. The shift in monetary policy is not just a technical adjustment; it reflects the central bank's faith in the robustness of Japan's economic growth. This optimism has a ripple effect, benefiting not just the lenders but also invigorating the construction sector, which underpins the nation's infrastructure and development.

"Some may prematurely declare the rally in bank shares complete, but that couldn't be farther from the truth," said Uda, whose half-century of experience managing Japanese equities lends weight to his analysis. His forecast is assertive, projecting additional rate hikes in the periods spanning June to September, as well as towards the year's end. Looking forward, Uda's perspective is that rising interest rates over the next two years are not just probable but inevitable.

The fund central to this discussion is Uda's Nippon Growth Fund, which proudly showcases top holdings in heavyweight financial institutions such as Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. The prowess of the ¥17 billion fund ($113 million) is evident in its impressive year-to-date returns exceeding 22%, a performance outshining the broader Topix equity index's 18% increase.

Uda's strategic approach marks a point of departure from the caution exercised by global investors, a group including houses like JPMorgan Asset Management and Nomura Asset Management, who have approached the addition of more bank stocks to their portfolios with a degree of reservation. Concerns over inflated valuations in the sector had held them back, particularly preceding the Bank of Japan's rate policy announcement on March 19. Prior to this pivot, the speculations had led to a dip in the Topix banks index after a period of consistent gains; the index managed to rally 3.2% after the central bank made its move public.

Bullish on Builders: Japan's Construction Sector to Ride the Wave of Growth

Not resting on the laurels of financial sector success alone, Evarich Asset Management is extending its confidence to the builders of Japan. With current stakes in construction frontrunners like Obayashi Corp. and Kajima Corp., the fund is banking on a dual benefit for these firms. Apart from tapping into the country's overarching economic recovery, there's anticipation of heightened government spending on defense and infrastructure. Uda's penchant for construction is particularly noteworthy considering it has not mirrored the overall market's performance over the past five years. Presently, the price-to-book ratios of builders hover around 1.2 times, in contrast to the Topix's 1.5 times.

Uda identifies the shift in Japan's economic growth engine—moving from information technology to infrastructure investment—coupled with an inflationary backdrop. This combination, he suggests, could see long-term yields ascend to the region of 1.5-2% within two years, propelled by the pressures of labor shortages driving prices upward. A glance at the benchmark 10-year Japanese government bond, which stood around 0.74% recently, conveys the potential trajectory of these yields.

This observation is rooted in the fact that Japanese companies are starting to utilize the cash reserves that have burgeoned during decades of deflation. It's a significant pivot, as these funds are increasingly channeled into capital expenditures, employee wage increases, and enhancing shareholder value. This strategic redistribution marks, in Uda's words, "the dawn of a new high-growth era for the Japanese economy," a phase unseen in the past 30 years.

A New Dawn for Japan's Economic Landscape

The decision by Evarich Asset Management to bolster its position in Japanese banks and construction firms is not just a testimony to the perceived strength of these sectors but also an indication of the broader economic optimism that permeates Japan. Analysts have observed that such confidence stems from a concerted effort by Japan's central bank to normalize its monetary policy in step with the nation's economic fundamentals. After a prolonged period of stimulating the economy through ultra-low and negative interest rates, the pivot toward raising rates highlights a significant turning point, signaling a departure from aggressive monetary stimulus and underscoring the maturity of Japan's economic recovery.

As Uda himself emphasizes, the future for Japan's economic growth is bright, with the central bank's recent moves underpinning a vision of stability and expansion. The consequent enhancement of bank profitability, as loan margins expand, is just one piece of the puzzle. The anticipated second-tier effects on the construction sector underscore the link between monetary policies and broader economic dynamics.

The Japanese economy, buoyed by these sector-specific tailwinds, may very well be entering a promising phase characteristic of increased infrastructure spending and commercial activity. With a keen eye on fiscal policy, market watchers anticipate further governmental initiatives that could provide an additional stimulus to sectors like construction, which linger behind in market performance.

Investment Strategies Amidst Rising Yields

Uda's investment philosophy takes on added significance against the backdrop of his prediction for long-term bond yields. The implications of such an increase could be manifold, encompassing not just the native industries, but also potentially influencing Japan's attractiveness to foreign investors. Should the yields rise as projected, the landscape for fixed-income investments would shift, prompting a rebalance in the portfolios of both domestic and international investors.

The spectrum of implications for Japan's broadening economic participation is vast. Financial institutions, for instance, could see a surge in foreign capital, incentivizing further diversification and innovation within the sector. This prospect of cross-border financial flows is one of the critical factors contributing to Uda's bullish stance on Japanese banks.

The role of government policy as a driver of sector growth cannot be overstated. Uda's strategy in channeling investments into companies likely to be direct beneficiaries of increased defense and infrastructure spending showcases a fusion of macroeconomic insight with a stock picker's precision. He identifies an intersection where government fiscal policy harmonizes, with corporate growth strategies, and he positions the Nippon Growth Fund to ride the upward wave anticipated from such alignment.

Uda's expectations for an inflationary environment, fueled by infrastructure investment and labor shortages, present a marked change in investment outlooks. It's a departure from the deflationary concerns that have long plagued Japan, providing a signal for investors to recalibrate their expectations and strategies for the Japanese market. His assertion is clear: Japan is not just on the path to recovery but is navigating toward a new zenith of growth.

A Renaissance in Japanese Equities

Japan's stock market, especially sectors highlighted by Evarich Asset Management, looks set to enter a renaissance period. As the cash reserves amassed during years of deflation begin circulating within the economy, the potential for vibrant corporate growth and prosperity generates enthusiasm among investors like Uda. It is a visionary outlook that digs beneath the surface of monetary adjustments to perceive the tangible impacts on company fundamentals and sector-specific growth narratives.

Moreover, the boldness of Japan's central bank to embrace rate hikes is seen as a seal of approval for the country's economic stability, endorsing the view that Japan is poised to step into an era of sustainable economic expansion. This optimism is mirrored in Uda's assertion that the cyclical resurgence could mark the most significant growth period Japan has experienced in decades.

In conclusion, the market strategy employed by Evarich Asset Management—and articulated by the sage insights of Yutaka Uda—underscores a profound conviction in the growth prospects of Japan's economy. As investors and analysts alike consider the implications of the Bank of Japan's policy shifts, Evarich's movement to increase its stakes in strategic sectors signals a broader confidence mirrored across the financial landscape of the country.

The boldness of this investment shift is emblematic of a new chapter in Japan's financial narrative, one where traditional industries are revitalized by the positive currents of economic policy changes and strategic capital allocation. It is a stance that resonates with historical precedence—a reminder of the robust cycles that define economies and the foresight required to capitalize on them.

©2024 Bloomberg L.P.

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