Japanese stocks have done a sumo-wrestler belly-flop so far this year — and that means it may be time to buy.
Make no mistake, Japanese stocks have been a disaster in 2014, with local benchmarks and U.S.-focused exchange-traded funds offering nothing but losses and dashed hopes.
The Nikkei 225 is off 6% so far this year, climbing back from a year-to-date dump of as much as 14% just a month ago. The most popular Japanese stocks ETF — the iShares MSCI Japan (EWJ) — is just short of breakeven now, having been off as much as 11% for the year-to-date back in April.
Indeed, Japanese stocks have fared so poorly this year, their performance is on par with equities in crisis-plagued Russia, which has gone out of its way to scare off capital.
That Japanese stocks should be such dogs after so many rounds of massive monetary easing and historic reforms makes the easy call a “sell.” Certainly, there’s no shortage of InvestorPlace writers making cogent cases slamming the land of the rising sun as an investment opportunity.
Our own Charles Sizemore notes that Japanese prime minister Shinzo Abe’s much-anticipated “third arrow” of reform falls well short of its target. After all, Japan can tinker at the edges all it wants, but the real problem is that the country’s “aging and shrinking demographics all but guarantee that Japan will eventually slide into oblivion.”
At the same time, InvestorPlace’s Anthony Mirhaydari notes that the Japanese policy of destroying the yen has hardly led to economic deliverance for Japan. Indeed, it’s only made some seemingly intractable problems that much worse.
Japanese Stocks: The Bull Case
Here’s how the strategist sums up the ugly year in Japanese stocks:
“As Japan’s economic growth momentum has slowed, structural reforms have generally been moving at a snail’s pace and the Bank of Japan (BOJ) hasn’t taken any further easing action, Japanese bulls have been growing impatient. Quick institutional money has been leaving the country in recent months, and the Japanese stock market is no longer the most crowded trade in the world, as it was last year.”
But Koesterich remains firm in his ardor for Japanese stocks, boiling his bull thesis down to five key points, which we’ve edited for length (you can read the full presentation here):
- Today’s global economic environment. In the second half of 2014, the global economic recovery will continue and U.S. interest rates to moderately rise. Historically, an improving global economy and rebounding Treasury yields coincide with strength in Japanese stocks.
- Stabilizing growth in China. Japan’s key trading partner is showing signs of stabilizing growth, which should help improve investor sentiment toward Asian markets as well as boost Japanese exports.
- Growth initiatives are set to regain momentum this summer. Prime Minister Abe’s revamped growth initiatives due in late June could generate new investor enthusiasm. Meanwhile, a proposed cut in corporate taxes (to 20% from around 35%) could be a major positive surprise for the equity market if implemented at a quicker-than-expected pace.
- The earnings outlook for Japanese firms. While the U.S. corporate sector has experienced little or even negative earnings growth in recent fiscal years, Japanese firms have posted solid earnings growth and it’s worth noting that Japanese accounting standards are more conservative than elsewhere.
- A weaker yen. The continued U.S. recovery and the divergent U.S. and Japanese monetary policies imply a weaker yen (vs. the dollar) in the medium term. This, in turn, should help support Japanese corporate earnings.
It’s a bold call in the face of crumbling prices for Japanese equities, the sinkhole of unfavorable demographics and the other factors cited by the bears on Japanese stocks. Heck, so much of the bull case has to go right at the same time that the BlackRock call could be as much of a Hail Mary as Abe’s reforms.
But it’s axiomatic that you’re supposed to buy stocks when they are low, and outside of Japan, it sure is hard to find good bargains in developed markets these days.
As this writing, Dan Burrows did not hold a position in any of the aforementioned securities.