Attractive returns and the breadth of opportunities are among the many reasons the U.S. has long reigned supreme for investors. However, according to one strategist, a different market has much better valuations right now. “The U.S. is relatively expensive. In terms of countries, Japan looks to offer the best combination of earnings growth, cheap valuations and policy support,” Tom Stevenson, investment director at Fidelity International, told CNBC Pro. “Japanese shares are trading on around 15 times this year’s expected earnings and 14 times earnings two years out,” he said. “There has been some increase in this multiple during the recent rally in Japanese shares, but they remain relatively cheap compared to the U.S. which trades on around 20 times earnings.” Japan’s Nikkei 225 Index is up over 18% year to date, while the U.S.’ S & P 500 Index is around 11% higher. Against this backdrop, Daniel Hurley, portfolio specialist for emerging markets and Japanese equities strategy at T. Rowe Price (TRP), is also looking at the country favorably. “With the supportive backdrop for Japan set to continue, including currency dynamics, global growth and corporate governance reform, the outlook for Japan equities are positive and valuations [are] not stretched,” he told CNBC Pro. Japan is seemingly on course for its strongest economic growth since the early 1990s. Inflation levels in the country have been improving after years of deflationary pressures, while earnings revisions are positive, Stevenson said. The stronger performance of Japanese equities follows the restructuring rules unveiled by the Tokyo Exchange Group earlier this year. Among the latest measures was one directing companies to “comply or explain” if they are trading below a price-to-book ratio of one — a measure that is indicative of whether a company is using its capital efficiently. The exchange also warned that companies that fail to comply could face the prospect of delisting as soon as 2026. Stock picks As investors weigh putting their money into Japan — especially given the weak yen vs. the dollar — TRP’s Hurley and Fidelity’s Stevenson both believe there are some investment gems to be found. Exporters in particular stand to gain given that they account for some 50% of the revenues registered by Japan’s Topix Index, notes Hurley. “A weak currency makes them very competitive and boosts their earnings,” he said. “Since the Federal Reserve [is] remaining hawkish and Bank of Japan dovish, the interest rate differential is set to persist,” he added. The yield on Japan’s 10-year government bond is currently around 0.8%, while the U.S.’ equivalent is around 4.86%. “As a result, the weak yen, while not necessarily depreciating further, should continue to remain supportive for exporters,” he added. Many of these exporters are large-cap companies in the automotive and industrial sectors. Hurley’s top picks include industrial equipment supplier Keyence , telecommunications player Sony , financial services group Orix , and cancer therapeutics developer Astella Pharmaceuticals . Meanwhile, Fidelity’s Stevenson has a liking for funds with exposure to Japan. Among his choices is the Baillie Gifford Japanese Fund, which he describes as a “growth-focused fund run by an experienced manager.” He also likes the Schroder Japan Trust, as it “allows the manager to invest in more illiquid investments like smaller companies.” The Baillie Gifford Japanese Fund’s top holdings include internet services company SoftBank Group (5.5%), financial services firm SBI Holdings (3.7%) and technology conglomerate Rakuten (3.5%), according to its fund factsheet. Meanwhile, the Schroder Japan Trust has holdings across several industries, including names such as electronics company Hitachi , Nippon Gas and Toyota Motor . Elsewhere, Stevenson also suggests that investors look at the iShares Core MSCI Japan IMI ETF , “a tracker fund run by an experienced passive manager with low costs.”
