TOKYO (April 17): Japanese stocks have been battered so badly that they’re too cheap to ignore, says the US$165 billion ($230.3 billion) investor Pictet Asset Management Ltd., after the Topix index tumbled to its fifth straight weekly loss.

“It’s a buying opportunity,” Hiroshi Matsumoto, head of Japan investment at the money manager, said in a phone interview from Tokyo.

Matsumoto gave two reasons why he’s bullish: The market is undervalued because investors are overly pessimistic about the next round of quarterly earnings starting in two weeks, and about the risks associated with North Korea. Once people realize they’re being too negative, Tokyo stocks should rise, he said.

The Topix has fallen 7.5% from a 15-month high on March 13. That leaves it down almost 4% for 2017, which is the second-worst performance among 24 developed stock markets tracked by Bloomberg. Shares have been buffeted by overseas factors, everything from fears about nuclear tests and missile strikes by Kim Jong-Un to US President Donald Trump’s comments on the dollar being too strong.

Even though the yen has gained more than 7% against the greenback this year, Matsumoto is betting that when companies announce earnings forecasts for the fiscal year that started on April 1, investors are going to get a positive surprise. His reasoning is that the solid global economy will support profits, and well-managed firms can address currency risks.

“If they show relatively stable guidance for fiscal 2017, it’s going to be a catalyst for people to start thinking that the market is cheap, and earnings aren’t so terribly bad,” Matsumoto said.

The Topix trades at 13.2 times estimated 12-month earnings, which is a 24% discount to the S&P 500 Index in the US.

There are signs Japanese stocks are oversold. The Topix’s 14-day Relative Strength Index fell to 29.3 on Friday, below the 30 level that indicates to some investors that shares have fallen too far, too fast. The Tokyo Stock Exchange short selling ratio was above 40% for 12 straight days through Thursday, despite only rising above that level nine times earlier in the year.

Rising Tensions

As investors watch the rising tensions around North Korea, with the Asian country’s failed ballistic missile launch on Sunday drawing a muted response from the Trump administration, Matsumoto says he’s not that concerned, especially after Chinese President Xi Jinping’s summit with his American counterpart.

“Of course, who knows what’s going to happen?” Matsumoto said last week before the missile launch. “But Xi and Trump had a meeting. We don’t see any evidence yet but based on Trump’s tweet there is a certain possibility that Xi is cooperating with the US” to put pressure on North Korea, he said.

An index of South Korean geopolitical volatility rose last week to the highest level in a month. The Topix fell 2.1% for its worst week since February, sending a measure of stock volatility to its highest since the aftermath of Trump’s election. By contrast, the Kospi index of South Korean equities has mostly shrugged off the tensions, climbing 5.4% this year.

Thin Skin

“Perhaps Japan’s hypersensitivity to geopolitics reflects the fact that it is the easiest market to trade in Asia,” Jonathan Allum, a strategist at SMBC Nikko Capital Markets Ltd. in London, wrote in a note to clients last week. “If everyone decides to take risk off the table, Japan is the table that is easiest to reach.”

Despite the North Korea situation, Japanese stock investment flows are showing signs of changing sentiment. While individuals, who tend to purchase on downturns, have been net buyers for each of the past four weeks, speculative traders also turned positive over the last two weeks, driving big inflows to the nation’s giant leveraged exchange-traded fund.

Foreigners, meanwhile, returned to the Japanese market as net buyers in the week ended April 7 after seven straight weeks of selling, according to Tokyo Stock Exchange data. The Topix is up this year when you factor in the yen’s gains: In dollar terms, the benchmark stock gauge has risen 2.9% in 2017.

Naoki Murakami, a Tokyo-based market strategist at AllianceBernstein Japan Ltd., says he’s just waiting for the diplomatic tensions to subside. Once they do, he says, investors can get back to focusing on companies’ fundamentals.

“Investors are only looking at geopolitical risk at the moment,” Murakami said. “If that abates, it’s only natural that stocks will go up.”