But Japanese stocks have gone nowhere for the past twenty years!
This is a protestation often heard from clients over the years, especially when other regional markets are advancing. Why should I have any exposure to Japan? Can’t we put those assets somewhere that is currently generating better returns? Demographics may be weak in Japan, but equity returns are not positively correlated with population growth. Japanese debt is another concern, but more than 90% of their debt is domestically held (unlike the PIIGS). Furthermore, Japan has its own currency, central bank and foreign exchange reserves that bring the net debt figure to about half the more than 200% total debt to GDP ratio frequently referenced. And, it should be noted that the Japanese equity market is not expensive; stocks can be purchased at reasonable prices.
Marc Faber, publisher of the ubiquitous “Gloom, Boom and Doom Report,” recently stated that Japanese equities could outperform all other markets in 2012. And, if you read our March Investment Commentary you will recall that prognostications such as this tend to garner a lot of attention and can spur investors to act accordingly. We are in no way trying to suggest Mr. Faber’s report or media interviews would be sufficient to single-handedly drive market activity, but it reminds us that anything can happen in the markets.
Credit Agricole (CA) suggested that it might be time to buy Japanese equities (February 2012) given the strong correlation between the value of the Yen relative to the US Dollar and the Nikkei index coupled with their expectation that the Yen was finally poised to depreciate. CA pointed out that if the USD/¥ exchange rate reached 81-82 it would confirm their belief that the trend had finally been broken, which could bode very well for Japanese stocks. But, Japanese banking and finance officials have for years maintained that they are committed to devaluing the Yen, yet have done relatively little to achieve that end. However, actions speak louder than words, and recent policy decisions strongly suggest that this time is indeed different. In fact, in late February the Yen reached 81 and it has remained near this level [ebbing modestly higher and lower] since that time. So, it seems that only time will tell whether or not this relationship continues to hold.
Acting on headline-grabbing stories instead of adhering to a long-term strategic asset mix is often detrimental to a portfolio in terms of both the level of diversification and rate of return. Not every market will be advancing at a healthy clip at all times, but it is highly unlikely that investors or investment professionals will be able to consistently predict which geographic market’s days in the sun are about to end and in what country the tide is set to turn for the better… over and over and over again. This is precisely why we prefer to have our clients maintain exposure to the various geographic regions at all times so that they can benefit from upturns without a specific call having to be made, which unduly hampers overall performance if market activity fails to match expectations.
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