A rush has begun to discover the major winning trades in international markets as a result of Donald Trump’s expanding lead in the US presidential contest. Japanese equities seem to be a wise investment based on history.
After Trump won the US presidential election in 2016, Japan’s Topix Index jumped by about 30% in US dollars in a year, outpacing gains of approximately 20% for the S&P 500 and the MSCI World Index. Experts predict that a weaker yen would help Japanese stocks gain momentum as investors look for alternatives to Chinese stocks ahead of a more assertive Trump administration towards Beijing.
“Japan equities should benefit from the depreciation of the yen against the US dollar due to higher US bond yields,” stated Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “Although Trump’s victory would benefit most of ex-China Asian equity markets, the Japanese equity market should benefit more,” the statement reads, referring to the fact that manufacturing companies dominate the Japanese stock market.
Japan’s stocks have recently surged after years of being ignored in favor of countries with faster growth rates. This is due to indications that the Asian economy has emerged from deflation and is headed toward sustainable expansion. On Thursday, the Topix indicator reached an all-time high, surging past its bubble-era peak, and more buying is expected to fuel it much higher.
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A weaker yen will be a major factor in the increase, helping exports from companies like Nissan Motor Co. and Toyota Motor Corp. Tokyo Stock Exchange and Bloomberg data show that more than half of Japan’s market value is made up of manufacturing companies.
Because of Japan’s enormous yield differential with the US, the yen has lost about 13% versus the dollar this year, the worst performance among major currencies.
An additional factor is valuations. The MSCI Inc. growth index for Japan trades at 22 times on a one-year forward blended earnings projection, making it the country with the cheapest growth equities among the major non-Chinese markets.
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To be clear, Japan’s stocks might not see a sudden uptick in value should Trump win. For starters, if tensions between Beijing and Washington rise, stocks that have a significant amount of exposure to China are probably going to suffer.
“If Trump is re-elected, we don’t think Japan would be the safest market in Asia,” stated RBC Wealth Management Asia senior investment analyst Jasmine Duan. “The Trump administration may act to force the yen to appreciate if it continues to weaken, which could help Chinese equities.”
However, others predict that Japanese stocks could benefit if international funds reallocate capital away from China in anticipation of a more assertive response from Trump. If elected, the former president has threatened to slap a tariff on Chinese imports that would exceed 60%.
Analysts predict that Japan will receive a portion of China’s capital. This is due to the fact that corporate governance is becoming increasingly important to Japanese businesses, and the central bank’s decision to abandon its extremely loose posture indicates that the economy is starting to recover stronger.
According to Nomura Securities Co. chief strategist Naka Matsuzawa, “Japanese stocks would be one of the better alternatives for global investors and bank stocks should perform better as the market focuses on the neutralization of the BOJ policy.”