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Japan ETFs Could Extend Gains in 2024

2024 is right around the corner. And now is an opportune time for advisors and investors to consider how devoted they’ll be to 2023’s winners next year. Japanese equities and the corresponding ETFs could be worthy of investors’ faith again next year. Japan ranks as one of 2023’s best-performing developed equity markets outside of the U.S. year-to-date. The MSCI Japan Index is higher by 14%, outpacing the MSCI EAFE Index by 380 basis points.

Investors would be doing even better if they hedged dollar/yen currency risk. Just look at the WisdomTree Japan Hedged Equity Fund (DXJ), which is higher by 44.5% this year. On the small-cap side, the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS) is up 34.5% year-to-date, thumping U.S. small-cap ETFs along the way. Bullish showings to be sure and while past performance isn’t a guarantee of future returns, market participants considering DXJ and DXJS can take heart in knowing that some experts believe Japanese stocks will continue trending higher in 2024.

Compelling 2024 Outlook for DXJ, DXJS

Count Morgan Stanley as those bullish on Japanese stocks for 2024. The bank recently noted it expects Japan’s benchmark TOPIX Index to gain 11% next year. Should that prove accurate, DXJ and DXJS would likely benefit.

“We see TOPIX moving further into its secular bull market,” according to the bank. “Sustained reflation and rising productivity at the macro level — working in combination with improved corporate governance at the micro level — will likely drive further improvement in corporate profitability in Japan.”

Also of note to market participants considering the WisdomTree ETFs is the point that as of late, other professional investors have waxed bullish on Japanese stocks. The usual refrain is that stocks in the Land of the Rising Sun are supported by strong earnings growth, lower valuations, and a central bank that wants to support economic growth will engineering modest inflation.

To be precise, Morgan Stanley forecasts that the TOPIX will gain 11.3% next year. If accurate, that’s far better than the expected gains of the more volatile MSCI Emerging Markets and MSCI China indexes, which the bank expects will rise 5.5% and 7.1%, respectively, next year. Plus, other tailwinds could boost DXJ and DXJS in the new year.

“Today, Japanese companies in aggregate have no debt but are sitting on nearly 2.5 trillion yen ($16.5 billion) of cash. Deflation has given way to mild inflation. And the Japanese currency is extremely competitive at around 150 yen to the U.S. dollar. Local manufacturers enjoy some of the lowest labour costs in the world,” according to Reuters.

For more news, information, and analysis, visit the Modern Alpha Channel.

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