Japanese small-cap stocks are coming into favor in an uncertain world in which a bottom-up style of investing can help identify companies that are resilient to changes in macro conditions, according to Invesco’s Yukihiro Hattori.
“Cheap valuations and high profit growth have made investors focus on small-cap companies since the August sell-off,” said Hattori a portfolio manager at Invesco Asset Management (Japan) Ltd. He said the US presidential election and the contest to choose a new leader for Japan’s ruling Liberal Democratic Party — which has nine contenders — have reinforced the value of his investment approach.
The turmoil at home and abroad in early August that sent Japan’s Topix index down more than 20% exposed the vulnerability of macro-driven strategies. The market has recovered since then and the Invesco OTC & Growth Stock Open that Hattori manages has returned around 3.8% in the past month, outperforming 96% of its peers.
The rally in the TSE Growth Market 250 Index came at a time when the US Federal Reserve’s interest rate-cutting campaign helped support the yen, which in turn underpinned the outperformance of domestic-focused small-cap companies.
Price earning ratio for the TSE Growth Market 250 Index is already hovering at around a historical bottom.
Hattori’s approach focuses on companies with dominant market share in sectors that are relatively immune to economic fluctuations.
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The fund’s top performer in August, BuySell Technologies Co., a retailer of used products, is among those that are less vulnerable to macro conditions and the yen’s volatility. The company buys used products through on-site visits to households.
Other top-performing stocks in the fund through August, grocery store operator Trial Holdings Inc. and computer network company Net One Systems Co., also have limited exposure to external volatility.
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Hattori is hopeful that Japanese retail investors will shift focus to small-caps after the yen’s strength hurt the valuations of their foreign assets.
“With demand and fundamentals improving, small caps will be in a really good phase.”
Chart: Bloomberg