Where Investors Have Turned Optimistic

buyers and sellersRuss Koesterich shares his observations from Japan, where investors have turned positive on their domestic market and cautious toward the United States.

Sean Pavone / Shutterstock

Sean Pavone / Shutterstock

The old adage “familiarity breeds contempt” helps explain the “love-hate” relationship most investors have with their home market.

On the one hand, many investors maintain a massive structural overweight to their home country, a phenomenon known as a “home country bias.” At the same time, when I travel, I’ve generally found that investors seem the most pessimistic about their own economy and market. The Europeans fret about the lack of local reforms. In Australia, investors usually bemoan the economy’s dependence on commodities. And in Japan, the case was similar, at least until this year.

Some Lessons—and Surprises—About the Japanese Economy

I normally travel to Tokyo at the end of each year to meet with Japanese institutional clients. In the past, the tone of these discussions was quite bearish, at least in regards to the local equity market. This year was different.

Investors, many of whom I’ve been meeting with consistently for the past five years, were unusually optimistic about the Japanese economy and the outlook for Japanese stocks. But while Japanese investors have turned positive on their domestic market, most voiced caution toward the United States.

With regards to their local market, whether it was the El Nino-induced warm weather or the fact that other markets simply seem to be in worse shape, Japanese investors were positively sanguine on the local state of affairs. Perhaps another year of relatively strong performance has shifted their view. Another potential explanation: Investors have recently been treated to several market friendly government initiatives in the run-up to the upcoming elections.

But regardless of what sparked their optimism, many local investors shared my positive view of the Japanese market, one of the developed markets I particularly like given Japanese stocks’ relatively compelling valuations and the country’s market-friendly monetary easing.

In addition to a generally bullish stance on domestic equities, local investors seemed relatively unconcerned about Japan’s massive government-debt market. Despite Japanese bonds’ barely positive nominal yields-Japanese 10-year bonds recently yielded less than 30 basis points (bps), according to Bloomberg data-and the fact that Japan has the largest debt burden of any developed country, nobody I spoke with seemed worried about Japanese debt.

Investors were more divided as to whether or not the Bank of Japan (BOJ) is likely to expand its quantitative easing (QE) program. That said, there was a strong consensus that the BOJ would be content to see the yen drift a bit lower, perhaps down to 130 yen per dollar.

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