The bull market driven by the Magnificent Seven was obvious to market observers and investors over the course of 2023. But there was another bull market which has been somewhat ignored by European investors—Japanese blue chip stocks. While the Nikkei 225 TR gained 18.42% (in EUR) over the course of the year, Europe-domiciled mutual funds and ETFs classified as Equity Japan gathered only 1.1 billion EUR of estimated net inflows.

Given the fact that Equity Japan can be considered as one of the core asset allocation building blocks, the relatively low inflows into Equity Japan are somewhat surprising, especially as a number of prominent portfolio managers and economists have forecasted a bull market in Japan.

That said, it looks like European ETF investors have embraced the Japanese bull market in their portfolios since ETFs classified as Equity Japan enjoyed estimated net inflows of 3.9 billion EUR, or 4.25%, of the overall flows in equity ETFs in the European ETF industry over the course of 2023.

Graph 1: Performance of Nikkei 225 TR (in EUR) and Estimated Net Flows for Jan. 1, 2023 - Jan. 31, 2024 (in Billions EUR)

(Click on image to enlarge)

Source: LSEG Data and Analytics

Nevertheless, it looks like European ETF investors do underweight Japan in their portfolios, since the assets under management in ETFs investing in Japanese blue chips only account for 35.2 billion EUR, or 3.12%, of the overall assets under management invested in equity ETFs in Europe.

This percentage is way below the weighting of Japan in standard global equity indices. Nevertheless, Equity Japan is the eighth largest Lipper global classification for ETFs in Europe.

Graph 2: Nikkei 225 CR for Aug. 31, 1984 - Jan. 21, 2024 (Month-End Values – in JPY)

(Click on image to enlarge)

Source: LSEG Data and Analytics

But why have European investors somewhat ignored the rally in Japanese blue chips? From my point of view, one reason for this might be the fact that investors have heard the story of the rebound of Japanese stocks too often. They may have thought this is just another time where valuations in Japan look attractive, but the performance of the respective stocks could be a disappointment.

However, this time seems to be different since the Nikkei 225 is chasing its all-time high despite some economic headwinds.

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