Hedge funds optimistic about Japanese stocks, focus on outsourcing, robotics, and pharmaceuticals.

At this week's hedge fund conference,Aihua trader Japanese stocks took center stage, dominating most of the popular investment options in Asia. Asset managers emphasized the efforts of Japanese firms in improving capital efficiency and the record performance of the Tokyo stock market.

At the annual Sohn Investment Leaders Conference in Hong Kong, 14 funds shared their best investment ideas. Attendees showed significant interest in companies in Japan's outsourcing, robotics, and pharmaceutical industries. In contrast, only two funds recommended Chinese stocks, down from seven in 2023.

David Michelson, founding partner of London’s Zennor Asset Management, stated that the greatest opportunities in the world's third-largest economy lie in companies that are "improving" or strengthening corporate governance, rather than those that are already excelling.

Michelson recommended Transcosmos, an outsourcing service provider, believing it could benefit from Japan's tight labor market. Despite a slowdown in growth, the company has shown a willingness to improve in capital management, such as planning to cancel treasury stock.

Although Japan has been strengthening corporate governance for more than a decade, the Tokyo Stock Exchange's recent move requiring companies to enhance capital efficiency has given a significant boost to these efforts. The exchange now publishes a monthly list of companies voluntarily disclosing their capital improvement plans.

Aided by a weak yen, the Nikkei index has surged 50% since the beginning of 2023, hitting a record high in February this year.

The Japanese government continues to raise management standards, "The chances for investors interacting with Japanese companies to win are higher than ever," Seth Fischer, founder of the activist fund Oasis Management, said in an interview before the conference.

The fund is optimistic about the rising potential of Kobayashi Pharmaceutical. The pharmaceutical company recently recalled a health supplement linked to five deaths. Fischer said at the conference that if the company improves crisis management or goes private, its stock could rise.

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