Japan's October 24 election has come and gone without much fanfare — most pollsters predicted that Prime Minister Shinzo Abe would win reelection, which he did by a landslide — but investors are still breathing a sigh of relief that the status quo has been maintained. Since election day, the market has risen by 1.66 percent, a vote of confidence for a leader who has worked hard to turn Japan's once stagnant economy around.
While the Nikkei 225 did take a step back on Wednesday — it had climbed for 16 straight sessions before dipping by 0.44 percent — it had reached a 21-year high on Tuesday. And so experts, like Atul Lele, chief investment officer of Deltec International Group, a Nassau, Bahamas-based financial services company, thinks Japan's market could climb by another 10 percent over the next 12 months.
That would add more gains to an already impressive performance. Year-to-date, Japan's market has climbed by 14 percent, similar to the S&P 500. It's also up 141 percent over the last five years, handily beating the S&P 500's 78 percent return. Now with Abe in power until at least 2021 — he called a snap election about a month to go to secure a stronger mandate — investors can turn their attention to the future.
One of the reasons why Lele is bullish on the country is that it's highly levered to the global economy, which is expected to expand by 2.7 percent this year, according to the World Bank. Since Japan's largest companies are export-oriented — autos and technology, for instance — the more people spend, the better Japan's market does. In September, Japanese exports grew by 18 percent, its biggest gain since 2013. "That's the primary reason why the market has done so well," says Lele. "The incredible global growth."
Over the next year, though, gains will come from more policy certainty, he says. There had been some questions around the country's monetary and fiscal policies and where they might go in the future. Looser monetary policy — in particular, its $790 billion of bond purchases a year and a 2016 interest-rate cut that sent rates below 0 percent — has boosted stock markets and improved domestic growth. It's likely that will continue, says Lele.
On the fiscal policy side, Abe has had trouble instituting tax reforms, which he has wanted to implement for several years. The government had said it wanted to increase the country's consumption tax from 8 percent to 10 percent in 2019, and now that Abe has been reelected, it's likely that will occur. "There's been no major fiscal policy changes over the past years," says Lele, "but now there's more certainty that the consumption tax will go through."
As well as Japan has been doing on a market and growth front — its GDP is expected to top 1.7 percent in 2017, according to the International Momentary Fund — its equity market is still one of the cheapest in the developed world. It's trading at about 13 times earnings — below its 15 times historical norm — and in the week before the election, investors withdrew a record $4.4 billion from Japanese equity-focused funds, according to EPFR Global.
Why the negativity even as markets climb? Part of the reason is that until recently, Japan was in a 25-year recession, which caused most investors to ignore the country. Many still haven't turned their attention back to the Asian nation, says Jay Jacobs vice president and director of research at Global X Management Company.
There are also some concerns over the country's long-term future. It's still the oldest demographic in the developed world, which means its labor market is shrinking. Shorter-term geopolitical issues, such as war with North Korea and Abe's post-election comments about wanting to revise the country's pacifist constitution, are also causing some people to stay on Japan's sidelines.
Jacobs also adds that more investors are spreading assets across more countries and asset classes, which has hurt Japan's inflows, if not the stock market. "I think people are taking a fresher look at Latin America and the broader emerging markets," he says. "So that's where some of the assets are being funneled."
Investors, though, are always on the hunt for a bargain, especially today, when the S&P 500 is trading at around 25 times earnings. It's only a matter of time until more investors start taking a closer look at Japan, says Lele. He's partial to global companies in the industrial, capital goods and technology sectors, such as Mitsubishi, Hitachi, Fujitsu and Sony, all of which benefit from stronger global growth. He also owns an MSCI Japan ETF, which, he says, "provides broad liquid exposure to the market."
Jacobs' company offers more mid-cap domestic exposure, which is useful for investors who want to take more direct advantage of the country's improving domestic story. Its Global X Scientific Beta Japan ETF, which holds companies like food processor NH Foods, construction company Kajima and industrial-equipment manufacturer Komats, is up 20 percent this year.
While Jacobs won't predict just how much the market might rise in the future, he too thinks the market could climb higher after Abe's win. More growth, an uptick in inflation and stronger wage growth in a tightening labor market, and a possible decrease in geopolitical tensions would all be a boon to markets. "These are a few different drivers that could be positive," he says.