Singapore: Now could be the time for foreign investors to return to Japanese equities, according to Goldman Sachs.

Corporate governance reforms, a recovery in domestic demand and the strong performance of local stocks in US dollar terms are all potential catalysts that may lure foreigners back after they sold net 1.1 trillion yen (Dh36.73 billion; $10 billion) of Japanese equities last quarter, strategists including Kathy Matsui wrote in a report on foreign investor positioning in the market.

The Topix index lagged other major markets in the first quarter, falling 0.4 per cent. In dollar terms, however, it climbed 4.4 per cent, not far off the S&P 500’s quarterly gain. The correlation between Japanese equities and foreign fund flows is decreasing because domestic flows are playing a greater role, the strategists said.

Foreign equity funds have changed their sector allocation considerably since the end of last year, the report said, as enthusiasm wanes over Donald Trump’s ability to deliver on reforms. “We see the rollback of reflation and Trump trades reflected in foreign investors’ positioning,” it said.

Weightings are substantially lower in export-related industries such as automobiles and transportation equipment, as well as the financial sector, and higher in areas driven by domestic demand, including food, retail and pharmaceuticals, it said.

The recent selling was triggered by the appreciation of the yen — it has risen 5 per cent against the dollar this year — and concerns about political risk for Prime Minister Shinzo Abe, the report said. It marked a sharp turnaround from the fourth quarter, when foreign funds purchased a net 5 trillion yen in Japanese equities, according to Goldman Sachs.

Japanese stocks rose Monday, the first trading day of the new fiscal year, driven by gains in industries focused on the domestic economy. There were also relatively upbeat data, with the Nikkei Japan manufacturing purchasing managers’ index showing expansion and the Tankan survey continuing to improve. Both were below survey estimates, however.

“The Japanese economy continues to be on a recovery path, although there is still a sense of caution as to how strong the recovery will be,” Societe Generale economists Takuji Aida and Arata Oto wrote in a note.