Japanese equity fund managers have bought oversold technology and small-cap stocks after investors dumped their positions in a three-day selling spree culminating in a 12% crash in the Nikkei 225 index on Monday, its biggest one-day decline since 1987.

Fidelity’s Nicholas Price and M&G’s Carl Vine said that the falls, which were triggered by the unwinding of the yen carry trade after the Bank of Japan’s surprise interest rate rise last week, were illogical and based on contagion fears rather than company fundamentals, 

The year’s top-performing financial and tech stocks were sold most aggressively, followed by a sharp correction in commodity-related companies. Healthcare and consumer staples proved relatively defensive but even the likes of Takeda Pharmaceutical'>Takeda Pharmaceutical and supermarket operator Seven & I'>Seven & I fell by about 10%. 

Price, who manages the Fidelity Japan (FJV ) investment trust and Fidelity Japan Growth fund, said that he had added to semiconductor companies and small and mid-cap growth stocks that had been pummelled.

The £204m trust had 23% invested in electric appliances at 30 June, including a 4.1% position in semiconductor company Tokyo Electron'>Tokyo Electron, which dropped more than 18% on Monday but has since recovered most of those losses. The electronics provider raised its full-year profit forecast after sales surged ahead of expectations, especially in China.

Price added that the diminished likelihood of the Bank of Japan raising interest rates further while global markets remained unstable led to him trimming his positions in banks, such as Mizuho Financial Group, in which the trust has 4.6% invested.

‘We have not seen a material change in corporate fundamentals and I believe that this is a short-term unwinding of positions that has gone too far,’ Price said of the overall moves on Japanese indices this week.

Citywire AA-rated Vine, who manages the £3.5bn M&G Japan   fund, trimmed positions in defensive names and added to financials and blue-chip technology stocks.

‘As is typical of such “volatility fits”, correlations in both the downdraft and the recovery tend to be very high. The opportunity for the investor, then, is to either find “baby-with-the-bathwater” situations or to add portfolio beta,’ he said in reference to stocks that move faster than the main market.

‘In our case, we have used both playbooks.’

The fund, which was the UK’s best-seller in 2023, holds 27% in industrials, 23% in consumer discretionary stocks and 15% in financials. Its tech positions also include Tokyo Electron as well as electronic parts manufacturer Rohm and semiconductor manufacturer Renesas Electronics'>Renesas Electronics.

Smaller companies activist fund Nippon Active Value (NAVF ) found it difficult to pick up the stock it wanted to buy. Paul ffolkes Davis, the top-performing trust’s AAA-rated fund manager, said: ‘It is a buying opportunity but it’s proved difficult to find offers. Liquidity in a panicked market is hard to find and the market makers were not sticking their necks out.’

The real deal

Japan’s investment outlook remains compelling given the ongoing corporate governance reforms that have seen record levels of buybacks and dividends over the last year. However, the market remains susceptible to concerns over a US recession, which will make for a bumpy ride until company valuations come back into focus.

Kepler Partners’ investment trust research analyst Josef Licsauer believes there are still many opportunities in Japan, despite concerns of yet another false dawn following the Nikkei’s 15% dive since hitting an all-time high of 41,190 less than a month ago.

‘What sets this period apart are the number of underlying factors that have supported the Nikkei’s ascension throughout the year,’ Licsauer said. ‘Japan, unlike many other nations, is welcoming positive inflation, which has allowed companies to exert their pricing power for the first time in years. Additionally, Japan is benefiting from increased demand given investors’ antipathy towards China.’