What is the estimated amount global managers need to buy for market weight exposure?

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Global Managers Need to Invest an Estimated RM1.34 Trillion in Japanese Stocks for Market Weight Exposure

Global portfolio managers are estimated to need to purchase approximately ¥42 trillion, equivalent to RM1.34 trillion, in Japanese stocks to restore their exposure to market weight. This significant capital inflow is driven by the substantial underrepresentation of Japanese equities in global portfolios, which has dwindled over several decades. Data from EPFR indicates that global ex-US stock funds are currently underweight Japan by 4 per cent, while Pacific regional funds exhibit an 8 per cent underweight position. The recent surge in Japanese stock performance, with the Nikkei index up 50 per cent in just over a year, is compelling these managers to increase their allocations to avoid missing out on market gains.
Significant Underweighting of Japanese Equities

The current allocation to Japanese stocks by global institutional investors is notably low compared to historical levels and market capitalisation. Global ex-US stock funds, for instance, are underweight Japan by approximately 4 per cent. Similarly, Pacific regional funds show a deficit of 8 per cent in their Japanese equity holdings. This persistent underweighting has been a long-standing trend, leading to a substantial gap that needs to be closed to align with market weight.
Driving Forces Behind Increased Demand

Several factors are contributing to the growing interest and subsequent demand for Japanese equities. The Nikkei's ascent to near record highs, coupled with favourable valuations, share buybacks, and market-friendly corporate decisions, has convinced investors that the current rally is not indicative of a bubble. Moreover, the performance of Japanese stocks over the past decade, with the Nikkei rising nearly 160 per cent in yen terms and about 75 per cent in dollar terms, has made it increasingly difficult for portfolio managers to justify their continued absence from the market.
Historical Context and Current Valuations

The current market sentiment surrounding Japanese stocks stands in stark contrast to the late 1980s "bubble economy" era. In the late 1980s, Japanese stocks traded at price-to-earnings multiples exceeding 50, whereas the Nikkei currently trades at a more modest P/E ratio of 22. The total market capitalisation of the Nikkei index, ¥680 trillion, is now less than that of just two major US technology companies, Apple and Nvidia, combined. This shift in valuation and market dynamics suggests a more sustainable growth outlook this time around.
Net Foreign Buying Trends

Foreign investors have demonstrated a clear trend of increasing net buying of Japanese stocks. Last year saw the highest net foreign buying on records stretching back a decade, amounting to ¥6.3 trillion. This momentum has continued into the current year, with net foreign buying reaching ¥1.2 trillion in January alone. These flows indicate a narrowing gap in underweighting as managers find it increasingly challenging to ignore the market's performance and potential.

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What is the estimated amount global managers need to buy for market weight exposure?

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