With the MSCI Japan Index higher by 11.23% YTD, some market participants may be pondering how much more upside Japanese stocks can deliver.
Those concerns may be compounded by the fact that the country is in the midst of a mild recession. A relevant issue to be sure, but one that’s not hindering the WisdomTree Japan Hedged Equity ETF (DXJ ). The fund is higher by nearly 20% year-to-date and almost 46% over the past year.
A 20% gain in just over two months might imply near-term upside is limited. But the opposite could prove to be true for DXJ. That’s because some market observers believe the catalysts that have ignited Japanese stocks to all-time highs have durability and are longer-ranging in nature.
Japan ETF DXJ Becomes Catalyst-Rich Story
Many global investors are looking for a market outside the U.S. that can deliver the goods. As Chinese stocks move in fits and starts, Japan is becoming an increasingly attractive option. Analysts are taking note. Recently, Bank of America Securities lifted its forecast on the Nikkei Stock Average to 41,000 from 38,500. It lifted its target on the broader Tokyo Stock Price Index to 2,850 from 2,715.
In what could be good news for DXJ, the bank believes more Japanese companies are poised to beat earnings per share estimates this year.
“Ryota Sakagami, chief Japan equity strategist at Citigroup, said he has increased this year’s estimates for the Nikkei Stock Average to 45,000 and for the Tokyo Stock Price Index to 3,100, citing favorable market conditions such as the increased likelihood the Bank of Japan will keep an easy monetary policy,” reported Nikkei Asia.
Another point in favor of DXJ is, this time is different. When the Nikkei rose to its prior record in the late 1980s, it traded for 60x earnings. That was bubble territory and the bubble burst in spectacular fashion. That prompted a nearly three-decade span in which Japanese stocks badly trailed their U.S. counterparts. As of March 4, Japanese stocks resided around all-time highs while sporting a 16% discount to U.S. equivalents, according to Nikkei Asia.
Deepening the case for DXJ are recent indications that the Nikkei rally is expanding beyond tech stocks. The ETF allocates about 12% of its weight to that sector, but there are inklings that industrials — DXJ’s largest sector weight — are getting in on the act, too.
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