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BlackRock upgrades Japan stocks, says they’re attractive despite Olympics Covid risks

BlackRock upgraded Japanese stocks this week, saying that earnings growth will be lifted in the second half of this year, even as its “virus dynamics” improve.

The emergence of Covid cases surrounding the Olympics held in Japan is “obviously a risk,” Thomas Taw, an investment strategist at BlackRock, told CNBC on Wednesday.

The emergence of Covid cases has cast a shadow over the Tokyo Olympics even Friday’s official opening.The first positive case hit the Athlete’s Village in Tokyo last weekend, and more than 70 cases have been reported to be linked to the Games since.

Japan has put Tokyo under a state of emergency till August 22 and no spectators are allowed at the games.

Why BlackRock likes Japan stocks

However, Taw pointed to conditions that favor the Japanese markets despite the heightened risks from Covid during the Olympics.

“There’s obviously a risk in terms of what happens with the Olympics,” Taw told CNBC’s “Squawk Box Asia.” However, he said it was a “temporary headwind.” 

For one, valuations are “a little bit more appealing in a place like Japan,” and the country’s central bank will continue to be accommodative, Taw said. He is also positive on earnings growth for companies there.

Security guards stand at an entrance to the Tokyo 2020 Olympics Athletes Village on March 31, 2020 in Tokyo, Japan.

Carl Court | Getty Images Sport | Getty Images

“Over the second half of the year, I expect some money will rotate into places like Japan, and Europe, which we have upgraded to overweight.”

In a report on Monday, BlackRock said it has upgraded Japanese stocks to neutral, which means the stocks are expected to perform on par with their peers in other markets. 

“We upgrade Japanese equities to neutral. We see a global cyclical rebound helping boost earnings growth in the second half of the year. The country’s virus dynamics are also improving,” it wrote.

Following a sluggish rollout earlier in the year, vaccination rates in Japan have risen substantially. The country’s rolling 7-day average for daily vaccine doses administered crossed 1 million a day in June, according to Our World in Data. 

Read more about China from CNBC Pro

BlackRock is ‘overweight’ on China

On China, BlackRock is currently “overweight” on stocks in the country, which means it sees them outperforming its peers in other markets.

Despite the ongoing anti-trust crackdown on China’s technology companies, Taw told CNBC there’s an opportunity for investors to raise their exposure to Chinese stocks.

Long term, strategically, we’re still advocating for investors to take advantage of sell-offs to increase exposure to Chinese equities.

Thomas Taw

investment strategist, BlackRock

He said there’s already been a significant 20% to 30% sell-off in Chinese stocks — as regulators increase scrutiny on companies, cracking down on anti-monopoly practices, cybersecurity and data security.

“Long term, strategically, we’re still advocating for investors to take advantage of sell-offs to increase exposure to Chinese equities. We are overweight Chinese fixed income as well,” Taw said.

“I think this is an interesting opportunity to at least raise your exposure if you are underweight —towards neutral, or even overweight.”

Disclosure: CNBC parent NBCUniversal owns NBC Sports and NBC Olympics. NBC Olympics is the U.S. broadcast rights holder to all Summer and Winter Games through 2032.


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