An election outcome favorable to the entrenched candidate, a booming economy and a stock market coming off a 17-day bull run — it all points to a resurgence in Japan investment.
At least, for now.
“Japan’s equity markets are hitting 20-year highs, yet they remain well below the lofty 1989 levels,” says Tracie McMillion, head of global asset allocation at Wells Fargo Investment Institute, in a new research note. “Japan’s recent equity-market resurgence can be attributed to improving economic growth, rising business and consumer confidence, and political stability.”
Even though Japanese equity prices have reached 20-year highs, valuation remains reasonable. “Earnings for the Nikkei 225 stock average at year-end 2018 are projected to be 33 percent higher than their level just three years ago,” McMillion says.
[See: 10 Ways to Play in the Asia-Pacific Stocks Pool.]
McMillion also points out that in late October, Prime Minister Shinzo Abe won re-election as prime minister in a snap election. “Prior to Mr. Abe’s election in 2012, Japan had seven prime ministers in seven years,” she states. “This leadership (and policy) continuity provides a level of comfort to equity investors. As a result, Japan likely will continue to see additional stimulus plans presented by Prime Minister Abe.”
Japanese stocks and funds had been performing robustly before the election news.
The benchmark iShares MSCI Japan exchange-traded fund (ticker: EWJ), with $16.5 billion in assets under management, is up 14.5 percent on a year-to-date basis.
Meanwhile, the WisdomTree Japan Hedged Equity ( DXJ, $8.5 billion in assets) is up 12.3 percent this year.
International investment experts expect that trend to accelerate.
“Japan is enjoying a cyclical upturn, reinforced by China’s stable growth rate and recovering global trade,” says Paul Christopher, head global market strategist, also at the Wells Fargo Investment Institute. “Looking ahead, our base case is that Japan continues to show better economic performance, because we see the global expansion as in the middle of its upturn.”
Christopher says he doesn’t see too much risk in Japan, but as always, there are caveats.
“The main risk to that scenario would come if China’s return to reforms slows that country’s economy, thereby making a new headwind for Japan,” he says.
If you’re an investor mulling over adding Japan to your portfolio, Christopher advises some caution. “We like the improvement in the Japanese economy and the policy direction,” he says. “Investors have noticed, too, and have bid stock prices higher. Consequently, the market looks fully valued, and we hold a neutral rating on Japan.”
[Read: How to Invest in Asia While Avoiding China.]
Christopher says his firm is looking for further earnings growth to support additional gains in valuation. “Our neutral rating means that we recommend investors include Japan as part of a diversified international portfolio that is allocated up to the investor’s long-term target allocation for international developed markets,” he says. “We would consider recommending holdings over that long-term target allocation, if we see valuations become more attractive.”
Other market gurus agree that Japan offers solid potential right now, but you’ll need to act fast.
“I view Japan as a potential short-term trade and not as a viable long-term investment,” says Charles Sizemore, a portfolio manager on Interactive Brokers Asset Management, an online investing company based in Boston. “Over a period of months or even a few years, central bank stimulus can do wonders for stock prices, and that’s what you’re seeing in Japan today. The Bank of Japan actively buys broad-market Japanese ETFs, as for all intents and purposes they were running out of bonds to buy.”
At some point the music stops, Sizemore notes. “Consequently, make sure you’re prepared for that by knowing the conditions under which you’d sell,” he says. “I would recommend some kind of trailing stop loss in this case.”
Sizemore says investors who want to buy Japan stocks should look at the tech sector. “To the extent you would want to park long-term capital in Japan, I would focus on robotics companies and on multinationals that get relatively little of their revenues domestically,” he says.
Another reason investment minds may be opening up toward Japan is that experts believe the U.S. stock market may finally be running out of steam.
“Frankly, I think that one of the reasons some investors are looking to Japan is that they believe the U.S. market is overextended,” says Robert R. Johnson, president and chief executive officer of The American College of Financial Services in Bryn Mawr, Pennsylvania.
“The current price-earnings ratio on the [Standard & Poor’s 500 index] is 25.5 times earnings, compared to a historical norm of around 15,” Johnson says. “Yet, when compared to the current yield on the 10-year Treasury at 2.44 percent, one could argue that U.S. stocks are undervalued. Japanese stocks sell for a much more modest P/E, at approximately 16.4 times earnings.”
Yet Johnson agrees that Japan isn’t a good bet over the long haul.
[See: 12 Tech Stocks Investors Should Watch.]
“I would not put my money in Japan right now, and the reason is that the demographics of the Japanese population are not favorable for long-term future stock market growth,” he says. “Simply put, the birth rate in Japan has declined considerably over the past 40 years. The result is fewer consumers and fewer workers to fuel the economy, while the number of retirees is increasing dramatically.”
“Additionally, Japan is not a country that embraces immigration,” Johnson says. “The long-term investment outlook for Japan is not positive.”
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Japan’s Bull Run Ignites Investors’ Interests originally appeared on usnews.com
