At Macro Ops we like trades where a confluence of positive tailwinds intersect with a thematic that has a long runway. Opportunities where attractive valuations spawned by negative to neutral sentiment combined with improving fundamentals and accelerating momentum are what we look for.
One of our current holdings checks all these boxes. I'm talking about Japanese equities. A theme we're playing using futures on the Nikkei (DXJ is the ETF alternative).
The Nikkei has had a good run since it first popped up on our radar back in September.
But this move is only getting started. Here's why it's time to be long Japan.
On a valuation basis, Japan is one of the cheapest developed markets. Trading at a forward PE of 15x it's well below the global PE average of 17X and the US's lofty forward PE ratio of 18.6X,
While the US and European markets have been getting all of the attention. The Nikkei has quietly made new multi-decade highs.
And after underperforming relative to the rest of the world (ROW) for decades, the Japanese market has been rising faster than global stocks as a whole since 2013.
Relative momentum is an important factor. It makes plainly visible the large trends created from global capital flows. These trends, once started, have a tendency to persist for years.
Behind this improving tape is one of the best looking fundamental backdrops of any advanced economy.
Japan had the fastest increase in earnings growth of all the major stock markets in 17'. Net profits for Topix companies increased 35% Y/Y in the first half of fiscal year 18'.
And the market continues to be overly pessimistic on earnings estimates. This is resulting in forecasts having to be continuously revised higher.
