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Don't Forget Japanese Stocks When Investing in Developed Markets.

Byline: Bernice Napach

With all the attention being paid to U.S. and European stocks, which have been setting record highs or approaching them, advisors and investors may not have noticed that Japanese stock prices are also surging.

The Nikkei 225, a price-weighted index containing the top 225 blue-chip companies trading on the Tokyo Stock Exchange, just reached a 21-year high. It's gained more than 28% over the past year -- more than the S&P 500 (23.5%) -- and is almost even with the S&P 500 index year to date, gaining 15.14% versus 15.3%. The Nikkei has also outperformed the EuroStoxx 50 and FTSE 100 over the past year and year to date.

Feeding the rally is an economy that's experiencing its longest expansion since 2006, though second-quarter GDP growth was revised downward to 2.5% from 4% initially; a very accommodative central bank; a prime minister who's intent on growing the economy; and a weaker yen.

Just days after his party's big win in a recent national elections, Prime Minister Shinzo Abe called for 3% wage hikes in next spring's negotiations between management and labor unions to help boost the economy and increase inflation. He said the government will take "all possible measures," including tax and regulatory reform, to get companies to invest more and increase wages.

The Bank of Japan has been doing its part to revive the economy with its own brand of quantitative easing, buying not only government bonds, as the Federal Reserve did during its QE program, but also stocks in the form of ETFs and real estate. It has also adopted a 10-year interest-rate target of around 0% while maintaining a 2% inflation rate for the first time.

In comparison, the Fed in the U.S. has ended its QE purchases and is beginning to unwind its swollen reserves by not reinvesting all the proceeds of maturing securities, and the ECB has announced it will begin to reduce its securities purchases. That leaves Japan, the third largest economy in the world, as the only economy among those three still using QE.

Cumberland Advisors has been bullish on the Japanese stock market for more than two years and is currently overweight Japanese equities with a 50/50 split between large-cap and small-cap stocks, says managing director and portfolio manager Matthew McAleer.

"Small-cap Japan, like small-cap Europe, has been an outperformer vs. large cap year to date and we will continue with that allocation split for the time being."

McAleer said the market bump after the election victory of Abe's Liberal Democratic Party favors Japanese securities over European stocks, but the advantage could fade as it has several times before over the past 12 months. Both regions are significant holdings in the firm's international strategy.

--- Related on ThinkAdvisor:

* Political, Regulatory Risks Drive Big Investors to Equities: The Economist

* Think 7% Returns Are Coming Back Anytime Soon? Think Again.

* Is It Finally Time to Look Beyond US Large Caps?

* Watch the US Dollar if You Own Emerging Market Securities

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Publication:ThinkAdvisor
Date:Oct 30, 2017
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