Bad news may be good news for international stocks. Europe is struggling with deflationary headwinds and Japan is suffering under the burden of last April’s hike in the consumption tax. Yet, over the past month, both markets are performing on par with the U.S. market. The reason: optimism that weak economies will force the ECB and BOJ to expand monetary easing. Should this happen, both equity markets are likely to benefit. In other words, bad news might be good for Japanese and European stocks.
In short, most of the past five years has been dominated by manic swings in investor behavior: fears of another recession followed by euphoria over central bank action to counteract that danger. To some extent this dynamic is still in play. What has changed is that the cycle is no longer the same in each country.
Market Realist – The graph above shows the prices of the S&P 500 as tracked by the iShares Core S&P 500 ETF (IVV) and European equities as tracked by the iShares MSCI EMU ETF (EZU). Both the S&P 500 (SPY) and European equities have been moving in tandem despite the deflationary pressures in Europe, the Ukraine-Russia (RSX) conflict, and the Scottish referendum.
The European Central Bank has already announced its plan to buy asset-backed securities. It’s likely to maintain an easy monetary policy in the future. This outlook is increasing investor confidence in Europe.
Market Realist – The graph above shows the prices of the S&P 500 as tracked by the iShares Core S&P 500 ETF (IVV) and Japanese equities as tracked by the iShares MSCI Japan ETF (EZU). Japanese equities have performed better than U.S. equities (SPY) in the week ended September 12, 2014. The Japanese TOPIX index touched its yearly high during the week even as the yen brushed its six-year lows.
Japanese and European markets could prove to be good investment opportunities for investors. As per Russ, Japan in particular offers good value. It seems to be a reasonably priced developed market segment.
Read our series “Bad news is good” is a hard habit for investors to kick to understand why investors are seeking value in equity markets.