The Japanese market experienced a major sell-off Thursday, prompting many investors to ask me for an update on my view of Japanese stocks.
The bottom line: I wouldn’t rush to sell Japanese equities. I continue to advocate a market weight to Japan for two reasons.
1. The sell-off was technical. Based on my team’s analysis, Thursday’s drop in the Nikkei and TOPIX indices was driven by a spiral of profit taking from retail investors and hedge funds, rather than a change in Japanese fundamentals.
2. What matters is Japanese stocks’ performance over the long term. The Japanese market may experience more losses this week, but Japanese stocks are up significantly year to date and over the last 12 months. In addition, they are likely to continue to receive support this year from strong corporate earnings as the Bank of Japan (BOJ)’s aggressive monetary policy weakens the yen.
But though Japanese stocks will likely be able to move higher this year, I’m not advocating an overweight view.
The country still faces structural long-term growth challenges. These include unfavorable demographics, declining productivity and mounting public debt.
In addition, as I’ve mentioned before, investing in Japan involves a currency effect for dollar-based investors. For pure exposure to potential BOJ easing-related stock gains, dollar-based investors would want to hedge out their exposure to the yen.
Sources: BlackRock, Bloomberg