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Despite a stellar run, Tokyo stocks still have room to rise


Technology stocks in the US have taken over the world.

The total market value of the Faangs — Facebook, Apple, Amazon, Netflix and Google (Alphabet) — exceeds 70 per cent of all of Tokyo’s first section.

Even as Japan’s Topix index touches highs not seen in more than a quarter century, Japan’s share of global benchmarks shrinks. It deserves more space in investors’ portfolios. The country has plenty of its own technology companies. Most of them actually make stuff, rather than dominating the intangible world of cyber space.

That Japan does not have its own Faangs is partly down to the infancy of its bull run. It is also, smirks Pelham Smithers Associates, because tech goliaths such as Keyence, Tokyo Electron and Fanuc all start with consonants. Technology accounts for about 13 per cent of Japan’s market, high for almost any country bar the US, which has nearly double that proportion.

Japan’s heavy weighting to manufacturing cyclicals, such as Toyota and Hitachi, helps explain why the market looks cheap relative to the US. Such asset-heavy groups will never deliver the kind of returns on invested capital seen in the US, where ROIC is roughly double Japanese levels.

But share prices reflect that. Even after surging a third in the past year, Japan trades at 14 times forward earnings — more than a fifth lower than the US. That rating could rise further, and not just because of the exchange rate. A stable Japanese government and better governance embedded into Japanese corporate law will continue to pay dividends for patient bulls.

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