Tom Yeung here with today’s Smart Money.
On August 19, I posed this question to Eric’s Fry’s Investment Report members:
If you asked a random Wall Streeter, “What was the best-performing major global stock market in the past month?”…
Even well-informed brokers might have answered, “America.”
After all, U.S. second-quarter earnings have been phenomenal. The average company in the S&P 500 reported 11.8% earnings growth during this season. That’s well above the 4.9% figure analysts had predicted in June, and that boosted the index to its highest level on record in late August.
Yet, the best-performing companies of the past month were not in the S&P 500, which only notched a 2% gain in that stretch. Average valuations were already too high for that.
Nor were they in the United Kingdom, where commodity prices are rising (the iShares MSCI United Kingdom ETF [EWU] was up +4.2% in the first half of August)…
Or in Hong Kong, which has seen a recent easing of the Chinese real estate bust (the iShares MSCI Hong Kong ETF [EWH] was up +5.5%)…
Instead, that prize goes to Japan, with an 11.2% gain (according to a similar measure).
In today’s Smart Money, let’s break down the country’s economic journey to explain why it receives that award.
This is just the start of a greater Japanese trend… and it should signal your attention to stocks outside of the United States.
If you’re familiar with Eric’s global macro approach, you know that international stocks can end up being some of the biggest winners in your portfolio.
Let’s dive in…
The Case for Japan
Japan was not always an attractive investment. Years of deflation encouraged the nation’s households to hoard cash (because cash’s purchasing power rose over time), starving domestic firms of capital for growth.
In short, the country’s “stock” was down… a lot.
Corporate behavior certainly didn’t help. Under Japan’s economy in the second half of the 20th century, the country relied on a keiretsu system, which involved a tangle of cross-shareholdings and overlapping corporate boards.
This often sheltered “zombie” companies and blunted accountability, hindering economic recovery in the 1990s.
Even an economic revamp in 2015 failed to fix underlying issues. Under that period of quantitative easing, the yen sank 25% against the dollar, leading to further declines in the Japanese economy and offsetting much of the gains in the stock market on a dollar basis.
That backdrop is now changing, thanks to the four major Japanese catalysts that Eric outlined in his January monthly issue of Fry’s Investment Report…
- Capital Return. Japanese companies have become more devoted to returning capital to shareholders through share buybacks.
- New Investors. The Japanese government is incentivizing individual investors to buy stocks in their retirement accounts through the newly revised Nippon Individual Savings Account (NISA).
- Mergers and Acquisitions. A growing number of Japanese companies are using their large cash reserves to acquire other companies.
- Artificial Intelligence. Many of Japan’s companies are at the forefront of AI adoption.
A fifth catalyst for Japanese stocks, inflation, is now additionally pushing savers out of cash. Core consumer price increases have accelerated from 2.7% in 2024 to roughly 3.3% this year, making cash and bonds far less appealing.
In other words, Japan’s “stock” is now up a little. And that’s turning into an investment bonanza, particularly among younger investors with no memory of Japan’s 1992 bubble burst.
Now, the market for financial influencers in Japan is booming, and the country is plastered with advertisements for NISA investing seminars. This newfound investor excitement has helped trigger a virtuous cycle of investments and returns.
Recent Japanese government data showed that capital spending, a key driver of domestic consumption, rose 1.3% in the second quarter, well ahead of the 0.5% expected in a Reuters poll.
And Japanese equities will also benefit as older investors follow the lead of their younger peers.
Now, much of this new capital still flows abroad. The two most popular funds in the NISA scheme include a global equity fund and a U.S.-focused one. That will likely change as structural reforms continue to deepen, which will lead to more activist investing and higher company returns.
So, due to valuation and structural reform, a new cycle of Japanese outperformance is underway.
Here is the best way to maximize that opportunity…
How to Maximize Your Profits
The answer is pretty simple: by diversifying some of capital into select foreign investments.
That’s exactly what Eric is doing at Fry’s Investment Report.
Nearly half of his recommendations this year have been in the foreign market… including a $12.9 billion ETF devoted to Japanese stocks. This fund is up over 3% in the last month, and over 20% this year.
Now, we know that foreign stocks can sound scary if you are unfamiliar with them. But you should never be afraid of foreign stocks.
In fact, Eric has been making these calls for 30 years now. And he’s seen some incredible success.
In 1996, Eric recommended buying Banque Nationale de Paris, a major French bank that, after a series of mergers, is now known as BNP Paribas SA (BNP.PA).
Although it may sound unbelievable, BNP has delivered a whopping 1,355% gain in the three decades since.
Finding quadruple-digit gains the likes of BNP isn’t just luck… it’s all about knowing where to look.
Until now, that knowledge has lived solely in Eric’s mind… and his hard drive. But he’s spent the past five years on a highly confidential project…
Using computer analysis to discover what all of his biggest winners have had in common.
This result is the first stock-picking algorithm Eric has ever used, designed to isolate stocks with 10X potential, time and again.
We’ll share more details about this system in tomorrow’s Smart Money. Plus, we’ll tell you why that “down a lot, up a little” pattern Japan is going through is so crucial to this project.
So, be sure to keep an eye out on your inbox.
Regards,
Tom Yeung, CFA
Market Analyst, InvestorPlace
