Japan’s tech sector is facing structural change. According to Morgan Stanley, these IT and software stocks could benefit in the long term from the AI boom and digitalization.
• Morgan Stanley sees a structural change in Japan’s economy that could benefit IT and software stocks
• US Bank recommends five “top picks” with robust business models and above-average profit growth
• Japan stocks are sometimes valued extremely cheaply in comparison
Japanese stocks are experiencing a real boom. More and more private investors are betting on companies from the land of the rising sun – and institutional investors such as Warren Buffett’s Berkshire Hathaway and the US bank Morgan Stanley have long recognized the potential that lies dormant in them.
Structural change in the Japanese economy
In mid-March, Morgan Stanley strategist Sho Nakazawa explained in an episode of the in-house podcast “Thoughts On The Market” what makes Japan’s economy so attractive right now.
As a result, the country has been facing structural change since the country’s first female prime minister, Sanae Takaichi, took office. Nakazawa names three central drivers for this: a changed philosophy, investments in infrastructure and the AI and tech boom.
The US bank is particularly fond of the last pillar of structural market change: despite increasing concerns about overinvestment in AI and tech, Morgan Stanley expects “non-linear returns as soon as breakthroughs in the field of AI occur,” says Nakazawa.
Top picks: Morgan Stanley is betting on these IT and software stocks
The strategic realignment of the Japanese economy is also reflected in Morgan Stanley’s current stock recommendations. The focus is primarily on companies with a robust business model, established market position and above-average profit growth.
As Investing.com reports, citing the US bank, the list is headed by Nomura Research Institute (NRI). Analysts expect average EBITDA growth of around eleven percent per year over the next three years. The growth driver is in particular the business with so-called “Business Platform Services”, in which the company acts as an infrastructural backbone provider for various industries.
NEC Corporation is also rated positively. According to Morgan Stanley, the technology group impresses with strong competencies in the areas of security and defense as well as a broad solution platform. For the coming years, analysts expect EBITDA growth of around ten percent annually.
According to Investing.com, experts believe Fujitsu will have even higher growth rates. With a forecast annual EBITDA increase of 16 percent, the company benefits in particular from its strong engineering base and its leading role in IT solutions for industry and public infrastructure.
In the area of business software for small and medium-sized businesses, Morgan Stanley highlights Obic Business Consultants (OBC). The company benefits from the structural trend towards Digitalization of back office processes. The main growth drivers are cloud solutions and a high proportion of recurring revenue.
The list is rounded off by the company OTSUKA, which particularly scores with an integrated “one-stop” approach to office and IT solutions. This means OTSUKA is well positioned to benefit from the increasing digitalization of small and medium-sized companies.
Is it worth getting started now?
A look at the valuations of Morgan Stanley’s top picks above shows one thing in particular: compared to US software giants, the recommended Japanese stocks are valued extremely cheaply, with P/E ratios between 10 and 30.
But the bottom line is that there is a lot to suggest that the current trend is more than a short-term rally – that’s what Morgan Stanley strategist Sho Nakazawa also says. Rather, there are signs of a long-term structural change from which IT and software companies in particular could benefit for years to come.
Benedict Kurschat, editorial team at finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
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