Global asset management giant Invesco: The major positive news for the Japanese stock market is about to disappear, it's time to buy into China.

Last year, Invesco Pacific Fund UK, a giant in the asset management industry that outperformed 91% of its peers, bet that the depreciation of the yen would stop and instead invested in undervalued Chinese stocks.

According to media reports on Monday, Tony Roberts, the fund manager of Invesco Pacific Fund UK, predicted that the yen would not further depreciate and had already reduced its holdings of Japanese export companies such as Honda.

At the same time, Roberts increased his holdings of Chinese stocks, stating that Chinese assets have good value relative to others.

Roberts' expectation of the yen hitting bottom is consistent with the predictions of other analysts. The market generally expects the USD/JPY to rebound to 145, speculating that the Bank of Japan will soon reverse its loose monetary policy and provide support for the yen. On the other hand, if the yen weakens excessively, authorities may intervene in the foreign exchange market to buy yen.

The support for Japanese stocks weakened as the yen stopped depreciating.

Japan accounts for one-third of the regional allocation of Invesco Pacific Fund UK. Although the fund has reduced its holdings of export companies such as Honda, Honda remains Roberts' largest holding in the country.

Boosted by the depreciation of the yen and increased profits of export companies, Honda's stock price has risen 58% year-to-date, nearly three times the increase of the TOPIX index. Despite a recent pullback, major Japanese stock indices have accumulated a gain of over 18% year-to-date, outperforming most other global indices.

Roberts pointed out:

"Currency depreciation, coupled with Japan's push for improved corporate governance, is the biggest positive factor driving the rise of Japanese stocks year-to-date. For example, the Tokyo Stock Exchange has been urging companies to take measures to increase their market value.

"Although governance reforms are expected to continue to help the Japanese stock market, the support from the yen is weakening."

Expectations for a shift in the Bank of Japan's policy have increased. Currently, Japan's inflation rate has exceeded the Bank of Japan's 2% target for 18 consecutive months, and consumer price growth in Tokyo in October accelerated beyond expectations. Rising prices may increase pressure on policymakers to prevent further yen depreciation and worsening inflation.

One of the main driving factors behind the depreciation of the yen is the gap between Japanese and US bond yields. US bond yields reached 5% this month, while Japan's 10-year government bond yield is around 0.88%. Roberts believes that in the future, this gap is "more likely to narrow than widen."

Optimistic about undervalued Chinese stocks

In contrast, Roberts increased his holdings of Chinese stocks, stating that Chinese stocks have good value relative to others.

Roberts stated that when looking at valuations, one can see that the pessimism surrounding Chinese stocks is quite extreme. According to data from Morgan Stanley Capital International, the one-year forward price-to-earnings ratio for Chinese stocks is around 10 times, while for Japanese stocks, it is around 15 times. According to data compiled by the media, since January 2022, this $312 million fund has been increasing its holdings of Chinese stocks compared to the MSCI Asia Pacific Index benchmark, with China accounting for 20% of its investment portfolio.

In Chinese stocks, Roberts is optimistic about categories of companies such as real estate developers with cash holdings exceeding liabilities, industrial automation companies that can compete with Japanese or German companies, and insurance companies that can attract a large number of uninsured population in China for growth.