As global uncertainties continued to mount in 2022, investors in the Japanese markets were forced to navigate a rocky road.
“Clearly, the markets the past year have been characterized by a fairly unstable market environment, including inflationary pressures, upward pressure on interest rates, rising geopolitical and military tensions, currency volatility, and monetary tightening,” said Takaaki Muramatsu, director of research at SMBC Nikko Securities.
Hidekatsu Watanabe, head of the equity research department at Mizuho Securities Co., confirmed that as pandemic-related restrictions receded in 2022, macroeconomic and geopolitical obstacles replaced them. “The outlook on equities had been comparatively bullish in anticipation of an economic reopening after the Covid-19 outbreak, but rising U.S. interest rates, the war in Ukraine, and lockdowns in China led to more political, economic, and financial challenges than expected,” he said.
What has this volatility meant for the country’s research analysts and offerings? “For sell-side research in Japan, this challenging combination of market factors for the investor increases the value of the capability of companies like ours to produce and deliver high-quality research to enhance investment performance for our clients,” said SMBC Nikko’s Muramatsu.
Voters in Institutional Investor’s 30th annual ranking of Japan research teams appear to value not only the capabilities but the consistency of the country’s domestic firms. The top four providers recognized by II’s All-Japan Research Team remain unchanged from 2022, with Daiwa Securities Group in the pole position once again. Mizuho Securities took second place, followed by SMBC Nikko Securities in third. Nomura and JPMorgan Chase & Co. — the highest-ranking global bank — placed fourth and fifth, respectively.
More than a thousand directors of research and heads of investment firms with major securities holdings in Japan rated their top firms across 32 industry and macroeconomic sectors. In line with other II surveys, scores were weighted by the voter’s commission spend. An additional team leaderboard was produced using respondents’ Japanese equity assets under management, but there was no difference in the results.
Two more leaderboards were generated to recognize the top individual analysts. These mirrored the team rankings, with the exception of Mitsubishi UFJ Morgan Stanley Co. in fifth place.
As hybrid work becomes the norm on both the sell-side and the buy-side, Mizuho’s Watanabe reported that his firm is focused on how analysts can generate high-quality work and share those insights in a timely fashion with both their clients and their team.
“We differentiate ourselves by producing a greater number of high-quality reports under our CDCX labels, establishing new approaches for research and analysis not bound by conventional wisdom through the development of younger talent, and encouraging discussions with management of each analyst’s covered companies,” he said.
Watanabe cited a September 2022 report, Nuclear Energy: Balancing Climate Change and Security, as a collaborative effort across sectors under the leadership of energy sector analyst Norimasa Shinya.
Muramatsu of SMBC Nikko said that his firm continues to prioritize metrics for its business that “emphasize analyst and product quality over a volume game, combined with a rising weight of targeted thematic cross-sector reports.”
“Following the introduction and spread of MiFID II, we continue to emphasize substantive research, which clients governed by those regulations will actually pay for,” he added, citing the 2018 European Union directive that unbundled research from trading and caused upheaval in the global sell-side research industry.
Individual analyst relationships in the domestic and global marketplace are more important than ever, Muramatsu said. “This helps us to identify the important marginal and incremental new client needs as the customer base continually evolves,” he said. To that end, in October 2022 the firm added Masahiko Maeda, a former portfolio manager at Nomura Asset Management, to its research team to oversee product quality and leverage his buy-side experience.
“As a broker, we innovate primarily in our content and our distribution techniques — including ‘discoverability’ of our research for global investors,” Muramatsu said. “This involves maintaining a tight grasp of new trends within both the changing domestic investor market, and as the global customer base evolves and grows further within the overall Japan equity commission wallet. We stay on top of what our clients need, and seek to deliver it.”
Both firms interviewed reported that as of the first quarter of this year, analyst overseas travel — to regions including the U.S., U.K., Europe, Hong Kong, and Singapore — is back to business as usual.
They say the rest of 2023 will be focused on how global uncertainties will affect Japan.
“Geopolitical risks are not something that an individual company can control, which in turn seems to paralyze a lot of Japanese companies into inaction,” said Watanabe of Mizuho. “At least based on macro data, companies do not appear to be making inroads in diversifying procurement channels, bringing planning and manufacturing activities in-house, or rethinking sales channels. In fact, we see a growing trend toward overseas investment, local planning and manufacturing, a decline in self-sufficiency, and increased dependence on overseas sales.”
According to Watanabe, the invasion of Ukraine by Russia has marked a new stage in the Cold War between China and the U.S., but geopolitical balances remain superficially unchanged for now. But at a government level, he said, there are plans to double Japan’s defense budget as concerns about stability in the APAC region grow.
“It is unclear at this point how much this move will improve Japan’s defensive capabilities, but it has been decided that a tax hike will fund the budget increase,” he explained. “The cost of national security will limit the potential of the Japanese economy.”