The Diverging Fortunes of China and Japan and How It May Affect Investments
Submitted by MIRUS Financial Partners on April 18th, 2024Investing internationally provides growth opportunities that may be different from those in the United States, which could help boost returns and/or enhance portfolio diversification. It may help to consider the risks, economic forces, and government policies that might continue to impact stock prices in these two news-making Asian markets and elsewhere in the world.
The MSCI EAFE Index, which tracks developed markets outside of the United States, advanced 15% in 2023, while U.S. stocks in the S&P 500 Index returned 24%.1 One of the world's hottest developed stock markets was in Japan, where the Nikkei 225 rose 28% in 2023, delivering the best performance in Asia.2 On the other hand, in China — which is still considered an emerging market — the benchmark CSI 300 Index lost more than 11% over the same period.3
A Tale of Two Economies
Ranked by gross domestic product (GDP), a broad measure of a nation's business activity, China is the world's second-largest economy after the United States.4 Japan fell from third place to fourth, behind Germany, at the end of 2023.5 In February 2024, the Nikkei surpassed a peak last seen in 1989.6 Conversely, Chinese stocks fell more than 40% from their peak in June 2021 before turning up slightly in February and
March.7
GDP growth in Japan has been lackluster; in fact, the nation barely averted a recession at the end of 2023.8 What has been driving the market's outperformance? After battling deflation (or falling prices) for more than two decades, the emergence of inflation in Japan has been good for businesses. Japanese companies have been putting their capital to work, growing profits, and returning them to shareholders, which has attracted foreign investors. A weaker yen helped by making Japanese products cheaper overseas.9 The Bank of Japan ended the era of negative interest rates when it raised short-term rates on March 19, 2024.10
China's GDP growth slowed to about 5.2% in 2023 as weaker consumption and investment cut into business activity. While China is still growing faster than most advanced nations, it is contending with a years-long real estate crisis.11 Deflation has set in, while underemployment
and youth unemployment have risen to high levels, damaging consumer confidence.12 Moreover, a visible government crackdown on the private sector has rattled investors and scared away many foreign firms.13 In early 2024, the Chinese government took steps to help stabilize the stock market that included boosting liquidity, supporting property developers, and encouraging more bank lending and home buying.14
Global Economic Outlook
The International Monetary Fund sees a path to a soft landing for the global economy, projecting steady growth of 3.1% for 2024, about the same rate as 2023. Inflation, which has fallen rapidly in most regions, is expected to continue its descent.15 The downside risks to this hopeful outlook include fiscal challenges, high debt levels, and lingering economic strain from high interest rates.
Price spikes caused by geopolitical conflict, supply disruptions, or more persistent underlying inflation could prevent central banks from
loosening monetary policies. The possibility of further deterioration in China's property sector is another cause for concern.16
A World of Opportunity
It can be more complicated to perform due diligence and identify sound investments in unfamiliar and less transparent foreign markets, and there are potential risks that may be unique to a specific country. Mutual funds or exchange-traded funds (ETFs) provide a relatively simple way to invest in a variety of international stocks. International funds range from broad global funds that attempt to capture worldwide economic activity to regional funds and others that focus on a single country. The term "ex U.S." or "ex US" typically means that the fund does not include domestic stocks, whereas "global" or "world" funds may include a mix of U.S. and international stocks.
U.S. and International Stocks
Some funds are limited to developed nations, whereas others concentrate on nations with emerging (or developing) economies. The stocks of companies located in emerging nations might offer greater growth potential, but they are riskier and less liquid than those in more advanced economies. For any international stock fund, it's important to understand the mix of countries represented by the underlying securities.
It may be tempting to increase your exposure to a booming foreign market. However, chasing performance might cause you to buy shares at high prices and suffer more severe losses when conditions shift. And if your long-term investment strategy includes international stocks, be prepared to hold tight — or take advantage of lower prices — during bouts of market volatility.
Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. The return and principal value of all stocks, mutual funds, and ETFs fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares. Foreign securities carry additional risks that may result in greater share price volatility, including differences in financial reporting and currency exchange risk; these risks should be carefully managed with your goals and risk tolerance in mind. Projections are based on current conditions, are subject to change, and may not come to pass.
Measure Risks Carefully
Like all investments, international investing has its own set of risks. Investors may be subject to currency volatility, geopolitical disruptions, and liquidity risks that differ from American investments. To help navigate these risks, it may be beneficial to access international stocks through professional active management. Contact Mark@MirusFinancialPartners.com to find out if international investments make sense for your long-term financial goals.
Additional risks associated with international investing include currency fluctuations, political and economic stability, and differences in accounting standards.
The MSCI EAFE Index is a stock market index that measures the performance of large- and mid-cap companies across 21 developed markets countries around the world. Canada and the USA are not included. EAFE is an acronym that stands for Europe, Australasia, and the Far East. MSCI ESG Research LLC is a Registered Investment Adviser under the Investment Advisers Act of 1940, and a subsidiary of MSCI Inc. Neither MSCI nor any of its products or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies and MSCI’s products or services are not a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such, provided that applicable products or services from MSCI ESG Research may constitute investment advice. MSCI ESG Research materials, including materials utilized in any MSCI ESG Indexes or other products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. MSCI ESG and climate ratings, research, and data are produced by MSCI ESG Research LLC, a subsidiary of MSCI Inc. MSCI ESG Indexes, Analytics, and Real Estate are products of MSCI Inc. that utilize information from MSCI ESG Research LLC. MSCI Indexes are administered by MSCI Limited (UK).
The Nikkei 225 is a price weighted equity index, which consists of 225 stocks in the Prime Market of the Tokyo Stock Exchange since the end of World War II. Because of the prominent nature of the index, many financial products linked to the Nikkei 225 have been created and are traded worldwide while the index has been sufficiently used as the indicator of the movement of Japanese stock markets.
The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. It has two sub-indexes: the CSI 100 Index and the CSI 200 Index. Over the years, it has been deemed the Chinese counterpart of the S&P 500 index and a better gauge of the Chinese stock market than the more traditional SSE Composite Index. The index is compiled by the China Securities Index Company, Ltd. It has been calculated since April 8, 2005. Its value is normalized relative to a base of 1000 on December 31, 2004.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Past Performance does not guarantee future results.
Investment Advisor Representative offering Securities and Advisory Services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer, and Registered Investment Adviser. Cetera is under separate ownership from any other named entity. MIRUS Financial Partners and Cetera Advisor Networks LLC are not affiliated.