Astoria’s current macroeconomic framework points towards a constructive view on international equities as non-US markets have become attractive in terms of both valuations and positioning within the current business cycle and inflation cycle. As an outsourced CIO to advisors, we inherit a lot of portfolios with few international equities. In short, non-US markets are further behind the inflation and interest rate cycle. Many European and Asian markets are up >10% YTD while trading at around half the P/E ratios of the United States.
Though we are optimistic about many rest-of-world (ROW) markets, we would contest that Japan has the most attractive upside.
Factors in the bullish case for Japan include attractive valuations, the country’s commitment to injecting liquidity via their yield curve control, and the weakness of the yen. The country’s national currency has dropped to an all-time low as the Bank of Japan, even under new management, continues to support the economy (Fig. 1). Per OMFIF, the country’s liquidity provision entered its 25th year in 2023 as the government aims to use ultra-low yields to control their own debt.
There is plenty of reason to believe the country’s assets could remain inflated in the medium-to-long term. Further deterioration of the yen is not just plausible – it seems inevitable. Japan’s debt-to-GDP ratio is a staggering 259%; the next highest country – Sudan – sits at 200%, while the closest G7 member is Italy at 150%. To avoid a default, Japan will need to maintain and potentially heighten their current liquidity injection measures, keeping the yen at historically weak levels.
Our optimism surrounding Japan is further supplemented by the country’s shifting demographic and corporate structure. For decades, nominal growth in Japan was virtually zero percent and investors hardly gave Japanese investments a second glance due to the nation’s aging population and rigid office culture. Conversely, in 2023, the country is set to see positive nominal growth for the first time in thirty years.
The national government’s adoption of “Abenomics” – fiscal reforms enacted by former Prime Minister Shinzo Abe – appears to have Japan’s economy on track for its strongest calendar year growth-wise since 1996. These policies, aided by the massive spending power held by the Japanese public due to excess savings, have Japan on track to outperform its 2023 potential GDP by more than 1%, according to JP Morgan Research (Fig. 2). In stark contrast, the American economy will likely not even reach its own potential GDP figure this year.
The recent optimism surrounding Japan has resulted in a discernible increase in interest in the nation’s markets. After Shinzo Abe’s 2012 election victory resulted in a huge influx of funds, but that reserve has steadily dwindled since the mid-2010s. For the first time in nearly a decade, according to BlackRock, cumulative foreign flows into Japanese equities are on a continuous uptick (Fig. 3). Notably, Berkshire Hathaway has been pouring billions into Japanese markets; this has drawn attention from investors who may have previously questioned the bull thesis for Japan.
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