Note: This is just one in a series of articles talking about my top picks for 2020. I encourage you to check out my other top picks under the "Trade Ideas" tab and look for the "Top ETF Picks For 2020" heading!
Developed markets should benefit from the same fundamental backdrop as emerging markets. Given the economic troubles in places, such as Germany, France and Italy, being more selective might be a better strategy than owning a diversified basket.
The Japanese economy looks a lot like that of the United States. Business investment and import/export activity have been weak, but consumer spending has remained strong. The Japan central bank has held its benchmark rate steady at -0.1% for some time, but gave strong indications earlier this quarter that it’s prepared to both lower rates further and add liquidity to the economy in order to stimulate growth. That type of central bank backing has done wonders for equity prices here in the U.S. and could deliver a repeat performance in Japan.
What are the major factors that could drive outperformance in Japan besides central bank stimulus?
- At 14 times earnings, Japan is about 12% cheaper than the developed markets average and far cheaper than the S&P 500.
- The belief that we'll see a further softening of the trade war ahead of the 2020 presidential election, which would open up international trade and reduce costs.
- The Japanese tech sector stands to benefit from the global adoption of 5G technology.
The one major factor which could affect the performance of Japanese stocks in 2020 is the recent increase to the national sales tax from 8% to 10%.
It appears that shoppers raced out to stores ahead of the October tax hike. Month-over-month gains in retail sales looked strong in August and September before falling off a cliff in October, as expected. The encouraging sign is that sales rebounded again in November offering hope that consumers haven’t significantly changed their spending habits.
Stocks weren’t terribly volatile in the second half of 2019 suggesting that the downside from the sales tax hike is already full baked into prices. If that’s the case, the dovish central bank and healthy consumer should lead to further gains.
As is the case here in the United States, the economy is likely headed where the Japanese consumer can take it. Spending looks relatively healthy, the economy shows signs of bottoming and the central bank stands ready to make sure the economic recovery takes hold.
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