Election Day is Tuesday. The specter of not knowing final tallies for the presidential race, and some down ballot contests, could figure prominently in the near-term outlook for domestic equities and bonds. When final outcomes are known, some may still feel this way.
However, the U.S. isn’t the only market that’s closely monitoring election results in this country. Some market observers argue Japan is will be intently watching the results of U.S. elections and that the near-term outlook for exchange traded funds such as the WisdomTree Japan Hedged Equity ETF (DXJ ) could hang in the balance.
The timing is interesting to say the least. In late October, the Liberal Democratic Party lost its majority in Japan’s lower house of parliament. That was a surprise to some. It was viewed as a potential drag on Japanese equities, but DXJ traded slightly higher last week and over the course of October. Now, investors mulling Japanese ETFs are turning their attention to how U.S. politics could affect Japan’s financial markets.
Why U.S. Election Matters
A second term for former President Donald Trump could be meaningful to investors evaluating ETFs like DXJ because he’s likely to push the Federal Reserve to continue lowering interest rates. The Fed is supposed to be independent of any president or party. It has already signaled rate paring could continue into 2025.
That could weaken the dollar. This may present a headwind to Japanese exporters, but the yen recently declined on the back of Japan’s snap election. That also benefited Japanese banks. This is pertinent because DXJ allocates 15.76% of its weight to the financial services sector.
“Our Japan banks analyst believes that the BOJ will continue to gradually raise interest rates allowing banks’ net interest margins to improve. While Japan bank shares have gained year to date, they’re not actually outperforming banks in our Asia coverage universe. So, we think there is still upside potential,” noted Lorraine Tan, Morningstar director of equity research, Asia.
Some money managers believe companies and consumers in other countries, including Japan, recently dialed back spending in anticipation of potential volatility caused by the U.S. election. Market observers argue that could be a catalyst for Japanese cyclical stocks. For its part, DXJ devotes 43% of its roster to industrial and consumer discretionary equities.
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