In the wake of wild swings in the Japanese market, investors remain unsure whether so-called Abenomics will be successful and where the market is headed. But some international fund managers see a chance to pick up some interesting stocks on the correction.
"Japan, maybe more than any market out there, is a market of stocks, not a stock market," Charles De Vaulx of International Advisors told the Morningstar Conference this week.
While he trimmed his positions "quite a bit" in Japan during the run-up, mainly because he still doesn't trust that companies will allocate capital efficiently, he's said he's been a net buyer on the correction.
De Vaulx doesn't know whether Abenomics will succeed in reigniting growth and creating inflation, but he said there are signs emerging that corporate Japan is changing.
He points to the possibility that Japanese companies will return more cash to shareholders through dividends and stock buybacks and may start to become more receptive to mergers and activist investors.
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Other fund managers are also still underweight but sniffing around for opportunities as the Japanese government fires its three arrows of monetary policy, fiscal policy and structural reform.
If they're successful, things could be changing for Japan, Jim Moffett of Scout Investments said. "'This time is different' are the four most dangerous words on Wall Street," but there could be some truth to that if Japan is able to tackle structural reforms, he said.
And they don't need to be major overhauls.
"It doesn't take major changes in policy to make a huge difference," Moffett said. He pointed to opportunities for agricultural reform, immigration reform and fostering greater consolidation in business.
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Nonetheless, he's still underweight Japan in his international fund, but said there are good companies doing interesting things.
Not all fund managers agree that corporate Japan has the capacity for meaningful change, however. Rajiv Jain of Virtus Investment Partners said Japanese companies "always spend too much on capex" and that cash just sits on their balance sheets.
He said it's been hard to find good investments. "While valuations look interesting, the better companies are dependent on China," he said. "I'm very concerned about risk coming from China's shadow banking system."
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But there is at least one stock that fund managers can agree on. Moffett, Jain and Mark Yockey of Artisan Funds all hold Japan Tobacco. The government has been selling its stake in the company to raise money, and Japan Tobacco has a large emerging-market business selling cigarettes in Russia.
And, Yockey said, "For the first time, they have professional management."
Despite the recent pullback, the stock is still up about 34 percent this year.
De Vaulx, meanwhile, sees opportunity in smaller Japanese firms. "There's more to Japan than a devaluation story," he said of efforts to push down the yen to help the major exporters.
"(Prime Minister) Abe wants inflation. Inflation could be good for small companies."