Four factors to continue to drive strong performance for Japan’s stock market – Charles Schwab

Japanese stocks have rebounded to 30-year highs and became the world’s best performers in September and the third quarter. In the view of economists at Charles Schwab, the performance momentum could continue with the reopening of the nation’s capital reinvigorating economic growth, the strong upward trend in revisions to analysts’ earnings estimates for Japanese companies, lower relative valuations and a historically bullish pre-election period.

The State of Emergency will soon be lifted, invigorating economic growth

“Japan’s economy is expected to accelerate to a robust 3.8% pace of growth in the fourth quarter from 1.6% in the third, according to the Bloomberg-tracked consensus of economists’ forecasts.”

Japan’s companies have the best upward earnings revisions trend of all major countries 

“There are currently 1.93 upward revisions for every downward revision, well ahead of the 1.42 in the US. This is a sharp contrast to a year ago when analysts gave Japanese firms only 0.79 upward revisions for each downward revision and gave US companies more than 2 upward revisions for each downward revision.”

History suggests that Japanese stocks are likely to perform solidly heading into and following the elections

“Looking back at elections over the past 20 years, Japan’s stock market posted a 6% gain on average in the six weeks leading up to the election (the only exception being 2000s ‘tech wreck’ bear market). Following those elections, stocks posted solid gains on average over the following 6 months.”

Valuations for Japan’s stocks are much lower than peers on an absolute and relative basis

“While price-to-earnings ratios for the US and other markets around the world remain near 10-year highs, potentially limiting gains, Japan’s stocks are priced near average historical levels.”