For months now, all eyes have been on the presidential election, which took place on Tuesday. However, some investors may have glossed over the fact that Japan held snap elections in late October. That resulted in Liberal Democratic Party (LDP) losing seats in the lower house of parliament.
That result was a surprise to some. That’s because the LDP has been the ruling party during a period of economic renaissance for Japan. And that includes the much-awaited return of inflation. Indeed, there was some volatility on the back of that surprise election, but Japan stocks and related ETFs have been mostly steady in recent weeks. For example, the WisdomTree Japan Hedged Equity ETF (DXJ) has barely moved over the past month.
Barely moving or steadiness might not be the glamour some investors are looking for. But DXJ’s recent showing could prove to be encouraging. That’s particularly so against the backdrop of headlines implying Japan was on the brink of economic and political calamity. That is not the case. And with some encouraging signs from Purchasing Managers Index (PMI) data, DXJ could deliver for investors as 2024 closes.
Focus on Fundamentals, Not Sensationalism
Even with the surprise election results, Japan’s economic fundamentals are mostly healthy and stocks there remain attractively valued relative to U.S. counterparts.
“That might lead to a post-election rebound in the PMI as the uncertainty fades. The Japan election last weekend may offer a lesson for investors in this regard. Japanese stocks, represented by the Nikkei 225, posted gains in the four days immediately following last Sunday’s election,” noted Jeffrey Kleintop of Charles Schwab.
Potential Encouraging Signs From PMI Data
For investors considering DXJ and other Japan ETFs, there could be some encouraging signs from the country’s recent PMI data, which was recently revised higher.
“More importantly, the Japan PMI preliminary reading released on Oct. 24 came in at [49.0. And] the final reading released on November 1 was a slightly higher [49.2. That suggests] business sentiment may have seen a slight rise despite the October 27 election uncertainties,” added Kleintop.
Predictably, the U.S. election is expected to affect Japan equities, including DXJ holdings. If domestic market participants prove jittery following Election Day, the dollar could strengthen. That could potentially boost the allure of currency-hedged ETFs such as DXJ. On the other hand, the path of least resistance for Japanese stocks might be to put both elections in the rearview mirror and compel investors to focus on fundamentals.
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