Why Japanese Stocks Could Rally 60%: Strategist
Equities have already surged in Japan as the yen falls, but with monetary easing looking increasingly likely, stocks are set to receive a further boost, according to one financial advisor.
"We're still about 40 percent below those 2007 highs," Cullen Thompson, co-founder & CIO of Bienville Capital, told CNBC at the Young Presidents Organization (YPO) meeting in Istanbul.
"If there is sincere policy follow-through then you could have that 50 to 60 percent increase in Japanese equities which represents a decade of equity returns in nine months," he said.
"Japanese equities are still fairly cheap on a price to book basis … we think you're going to see some of the best earnings growth in Japanese equities, in the world," Thompson said. He said equity growth was underpinned by forthcoming events such as the Bank of Japan meeting in April when the central bank could introduce monetary stimulus.
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Since Prime Minister Shinzo Abe called for "unlimited easing" in November to tackle the country's deflation and stagnant economy, the yen has dropped up to 16 percent versus the dollar and 21 percent against the euro. The Nikkei 225, however, has surged 29.2 percent.
Hopes of monetary easing in Japan have been further strengthened with the nomination of Haruhiko Kuroda, a proponent of aggressive policy action, as next Bank of Japan governor on Thursday. Kuroda is expected to put into effect Abe's economic policies (known as "Abenomics") through increased asset purchases.
(Read More: 'Abenomics' Picks Up Speed With Kuroda Nomination)
Thompson likened the currency and equity shifts in Japan to those seen in the U.S. before the Federal Reserve started its quantitative easing program.
"Phase one [in Japan] was seen when the currency weakened, that created a lot of excitement for equities because Japan is thought of as an export-orientated economy so the equity market moved. What we're seeing now is phase two, where the equity market is rallying somewhat independently from the currency," he told CNBC on Friday.
He added: "It suggests that this reflation play is taking hold and we're seeing a behavioral and psychological shift that can take us to the next level."
On Monday, the yen strengthened against the dollar and euro in its biggest daily gain since May 2010 as Italy's inconclusive election result caused investors to seek a safe haven. The Nikkei dropped 2.3 percent after the election result, but recovered to its pre-election level on Friday.
(Read More: 'Ugly Move' in Yen a Sign of What's to Come?)
Thompson explained that there were ways to long Japanese equities and hedge currency exposure, saying that the exchange traded funds (ETF) such as the DXJ (the WisdomTree Japan Hedged Equity ETF) could protect investors from dollar/yen fluctuations.