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For investors tired of Fed noise and Greece fear, Japan beckons

Where can investors go to escape those ceaseless headlines about the Greek debt standoff and tedious debates over how and when the Fed might move?

Try Japan.

The Japanese stock market is one place that appears attractive right now, regardless of the outcome of the Greece talks or the Federal Reserve’s course of action, says Jason Trennert, chief investment strategist at Strategas Research Partners.

In contrast to the U.S., where the Nasdaq Composite just eclipsed its 2000 high this week, Japan’s bellwether Nikkei index hasn’t notched a new high in 25 years. Japan’s investment bubble was arguably the most extreme in modern times, and the country over most of the past two decades has failed to restore growth or rationalize its corporate sector. The Nikkei 225 index, while up nicely in the past year, still trades at about half its all-time peak set in late 1989.

“The big marginal change there now,” Trennert says in the attached video, “is that Japanese companies are now worrying about shareholder value, and they’re being exhorted to do that by the Prime Minister, [Shinzo] Abe.”

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While the stimulus efforts of the Bank of Japan and Abe’s attempts at economic reform have been aggressive, economic growth has remained inconsistent.

Still, Trennert says, “In our business, sometimes you can make more money as things go from terrible to bad than you do from pretty good to good. In Japan, you’re starting from a very low base – there’s a lot of potential there.”

More broadly, Trennert is among the investment professionals who are experiencing “macro fatigue” after some seven years in which central bank strategies and government policies have dominated financial-market action. This environment has meant many asset classes and market sectors have moved together, regardless of their particular underlying fundamentals.

This macro myopia is in the process of fading, mainly because the Federal Reserve is starting to think about ‘normalizing’ interest rates,” he argues. With short-term rates at zero since 2008, the Fed effectively set the cost of corporate capital as a constant, flattering the performance of weaker companies relative to strong ones.

While he admits that he’s voicing the vested interest of his firm’s active fund manager clients, Trennert suggests that stock picking should begin to become more effective as rates drift higher before too long.

In the meantime, Trennert advises focusing on financial stocks and those geared toward discretionary consumer spending.

He’s betting that even once the Fed begins lifting short-term rates, it will proceed slowly, even as the economy gathers strength. This could send longer-term yields up a bit more than short rates, steepening the yield curve.

A wider net-interest spread would “fall right to the bottom line for a lot of financials, and it’s something that would prompt banks to take a little more risk.”

On the consumer front, savings from lower gasoline prices were expected at the start of 2015 to drive a pickup in household spending. Much of the windfall was saved or went to reduce debt, or went into “experiences” such as dining out - leading to disappointing retail sales growth.

Yet now, with energy prices still moderate and “wages bottoming,” some pent-up demand for bigger-ticket consumer goods could well be unleashed, he adds.

 

 

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