The U.S. stock market run-up has lasted 8.5 years, starting in early 2009.
According to Morningstar, in the seven-year period between 2009 and 2016, the Standard & Poor’s 500 index posted average annual gains of 14.8 percent, mixing in a low of 1.38 percent in 2015 to 32.39 percent in 2013.
But like all good things, even a bull market comes to an end, and this one will, too experts say. Bloomberg notes the ratio of bearish derivatives on the S&P 500 relative to bullish derivatives has climbed to its highest level in more than two years, and a new survey of global fund managers by Bank of America/Merrill Lynch found that managers are underweight U.S. equities by the most in 10 years.
[See: 10 Ways to Play in the Asia-Pacific Stocks Pool.]
Additionally, data from the Investment Company Institute shows $31 billion in outflows from domestic equity mutual funds and exchange-traded funds in July and August. “That’s the largest two months of outflows since January and February 2016,” says Fusion Wealth Management in a Sept. 24 research note.
Where are those inflows going? One landing spot is Japan, where equity funds experienced their biggest fund inflows in five months, in the last week of August.
That shouldn’t be a surprise, as more and more investment firms are touting Tokyo as a good alternative to the U.S. equity markets.
Glenmede, a wealth management firm, published a research note last week calling Japanese equities “an attractive opportunity, noting that Japan’s central bank left interest rates unchanged even as other major central banks around the world move toward the end of the accommodative policy.
“Plus, at nearly 13 percent growth in earnings forecasts year-to-date, Japanese equities continue to show strength in fundamental data, providing an attractive opportunity for investors,” Glenmede analysts say in the note.
Economic growth. Other market watchers say that Japan’s economy is moving forward, despite some demographic and financial headwinds.
“By the standards of the Japanese economy’s performance over the last couple of decades, which has been quite disappointing, the current outlook is fairly good,” says Lee Bransetter, professor of economics and public policy at Carnegie Mellon University’s Heinz College.
Tokyo’s economy is growing about as fast as could be reasonably expected, given that its population is aging rapidly and the country’s labor force is actually shrinking rapidly, Bransetter says. “Plus, the central bank is pursuing a policy of fairly aggressive monetary easing, and that policy is likely to be maintained for the next several years, supporting growth,” he says. “Plans to raise taxes have been postponed — though taxes will need to be raised significantly over time to bring government revenue into line with the high expenditures required by Japan’s rapidly aging population. Also, the economies of Japan’s trading partners are growing at reasonably healthy rates.”
Lyn Alden, founder of Lyn Alden Investment Strategy in Atlantic City, New Jersey, calls Japan stocks “a fair opportunity.”
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Yet Alden says Japan has its challenges, too. “For example, the cyclically-adjusted price-to-earnings ratio of Japan is currently around 26, which makes it one of the most expensive in the world,” Alden says. “On the other hand, the average price-to-book of the market is quite low at under 1.5. Unlike the American stock market, which is expensive based on every common valuation metric, Japan is either expensive or cheap depending on how you measure it. Regardless, it’s not a great bargain by any stretch.”
Additionally, at first glance, the dividend yield for the Japanese market is about 2 percent, which looks like a great deal. “But it’s considerably lower than that in practice after you factor out the expense ratio of 0.48 for the top funds,” Alden says.
All of the above suggests the current Japanese economic expansion could continue for several years, with both a risk and a growth caveat. “The fastest that we can expect Japan’s economy to grow is somewhere between 1 and 2 percent per year — probably closer to 1 percent,” Bransetter says.
Possible tailwinds. He also issues a note of caution for investors. “This is a good outlook by recent Japanese standards, but there are clearly many other places in the global economy with much more exciting growth prospects,” Bransetter says. “Set against the positive factors, one also has to keep in mind tensions over North Korea’s nuclear program, uncertainty about the fate of the global trading system in the age of Trump, and the possibility of a significant slowdown in China — all potential negative shocks to which Japan is highly exposed.”
Investors should take a realistic approach to investing in Japan, without any inflated expectations of huge portfolio returns. Take that mindset, and Japan as a portfolio landing spot can be a good idea.
[See: 9 Psychological Biases That Hurt Investors.]
“Global diversification is good, and every investor should have some exposure to Japanese equity markets,” Bransetter says. “But it is hard to make the case that Japan’s markets will yield very large gains in the near future.”
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Japan Is a Good Option for U.S. Investors originally appeared on usnews.com
