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Opportunities Seen in Small- and Mid-Cap Japanese Stocks as Rally Continues
Corporate Governance Reforms Bode Well for Small- and Mid-Cap Stocks
As the Nikkei 225 reached new highs this week, some investors believe small- and mid-cap Japanese equities could start to participate in the gains after largely being left behind during the initial surge. The rally was initially helped by corporate governance reforms and a weaker yen. Should the path of corporate governance strengthening sustain itself and extend to small- and mid-cap stocks, those groups could see stronger outperformance versus their larger-cap peers.
Cyclical Stocks Could Outperform
Cyclical stocks, more heavily represented in small- and mid-cap Japanese equities than in large-caps, could also outperform should global recession concerns ease. However, these opportunities are considered near-term for traders, and large-cap industrial stocks will continue to outperform in the long term given the weakening demographics story in Japan.
Investment Opportunities to Consider
One passive investment option for investors interested in small-caps is the iShares MSCI Japan Small-Cap ETF (SCJ), which has a market-cap weighted benchmark for small-cap equities in Japan. It has an expense ratio of 0.5% and a year-to-date gain of over 7%. However, investors may prefer to gain exposure to the market through highly rated mutual funds, such as Fidelity Japan Smaller Companies (FJSCX), which has $379.3 million in assets under management and a four-star rating from Morningstar. Another option is the actively managed Hennessy Japan Small Cap Investor (HJPSX), which has $111.2 million in assets under management, a 9.5% gain year-to-date, and a top holding in transportation equipment maker Musashi Seimitsu Industry.
Conclusion
Despite the recent rally in Japanese stocks, small- and mid-cap stocks still have potential for outperformance as the country's corporate governance reforms continue to progress. While near-term opportunities for traders, the long-term outlook still favors large-cap industrial stocks. Investors looking to gain exposure to small-cap Japanese equities may consider ETFs or highly rated mutual funds.
For new businesses looking to gain exposure to the Japanese equity market, small- and mid-cap stocks could present a growth opportunity. With corporate governance reforms helping to drive gains, these stocks may be able to outperform their larger-cap peers in the near-term. Additionally, cyclical stocks, which are heavily represented in small- and mid-cap Japanese equities, could also see outperformance should global recession concerns ease, providing further opportunities for growth.
Investors looking to gain exposure to this market may consider passive investment options such as the iShares MSCI Japan Small-Cap ETF or highly rated mutual funds like Fidelity Japan Smaller Companies. Actively managed funds like the Hennessy Japan Small Cap Investor may also present opportunities for strong returns.
It's important for new businesses to consider the long-term outlook, which still favors large-cap industrial stocks due to Japan's demographics story. However, small- and mid-cap stocks could offer a growth opportunity for businesses looking to diversify their portfolio and gain exposure to the Japanese equity market.
Article First Published at: https://www.cnbc.com/2023/06/17/the-japanese-equity-rally-could-broaden-out-some-small-and-mid-cap-names-may-get-a-boost-.html
