Stock Picker Beating 99% of Peers Bets on Japanese Real Estate

(Bloomberg) — A top-performing fund manager for Japanese stocks is betting on a revival of the nation’s property shares after worries over the Bank of Japan’s hawkish shift drove the sector’s underperformance. 

Such fears are overblown, according to Emily Badger, who co-manages the MAN GLG Japan CoreAlpha Equity fund that beat 99% of its peers in 2022. While the Bank of Japan will eventually abolish its yield curve control and ultra easy monetary policy, the process will be gradual and the sector’s depressed valuation already reflects such expectations, she said. 

“Real estate in Japan is one area where we see significant opportunity,” UK-based Badger said in an interview last week. “We feel the pessimism and concerns are overdone” as the actual impact on developers should be lower than what’s currently priced in, she said.

The BOJ’s shock decision in December to widen its bond yield cap and an upcoming leadership change have reshaped the stock market outlook, prompting a divergence in sector performance as investors gird for potentially higher rates. The financial sector should continue to be a beneficiary, according to Badger, given the still-low valuations despite having outperformed the Topix since December. 

On Friday, BOJ Governor nominee Kazuo Ueda said the central bank will need to consider normalizing policy if the outlook for prices improves, while backing a continuation of stimulus for now. 

The Topix Real Estate Index is little changed for the year through Friday to trade at a price-to-book ratio of 0.9 time, versus a 10-year average of 1.4. In comparison, the broader Topix Index has gained about 5% over the period, while a sub-gauge for banks has jumped nearly 10%. The latter still trades at 0.6 times book value.

Top Holdings 

Panasonic Holdings Corp., Sumitomo Mitsui Financial Group, and Mitsubishi Estate are among the biggest positions at the ¥290 billion ($2.2 billion) Japan CoreAlpha fund, which Badger co-manages with Jeffrey Atherton, Adrian Edwards and Stephen Harget. The four ranked as no. 1 Japanese equities fund managers according to Citywire rankings for the year to last month.  

Japanese banks have been improving their underlying profitability over the past decade on the basis that interest rates won’t increase, and an eventual monetary policy normalization would support their businesses, Badger said. 

However, as the normalization wouldn’t mean a sudden increase in interest rates to “5-6% levels” in Japan and only a gradual increase, the team is “buying into the weakness” of property shares, she added.  

The view that the potential hit to the property sector has been priced in is also shared by Goldman Group Sachs Inc. Analysts at the bank wrote last month that while “negative impact from future possible interest rate hikes would be inevitable,” some of that may have already been priced in. 

Corporate Governance 

Badger, who joined Man GLG in 2015 and has studied chemistry at university, also sees cyclical stocks including machinery and chemicals as attractive.  

The sector’s valuation plunged last year amid global recession fears and Covid restrictions in China, but the companies are fundamentally strong, she said, without naming the stocks. 

Based in York, England, Badger and the team have focused on large caps due to the language barrier and easier access to corporate disclosures. The CoreAlpha fund has returned more than 8% in 2023 through Wednesday, Bloomberg data shows, nearly twice the benchmark’s performance.  

She has high expectations on Japan’s corporate governance reform, particularly the latest directive from the Tokyo Stock Exchange on requesting firms trading below book value to come up with capital improvement plans. 

READ: Tokyo Bourse’s Buried Notice Spurs Surges in Cheap Japan Stocks  

As the focus on corporate governance grows, Badger is also hopeful on the change it will bring toward increasing diversity.  

“As corporate governance continues to improve, we will start to see more female representatives from corporates themselves in meetings,” Badger said. “Also hopefully more female fund managers focusing purely on Japan.”

–With assistance from Ishika Mookerjee.

©2023 Bloomberg L.P.

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