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Nikkei Scales 21-Year High on Strong Earnings: 3 Fund Picks

On Nov 1, Japan’s benchmark index Nikkei 225 reached its best level in the last 21 years after companies like Honda and Sony released encouraging full-year earnings projections. Foreign investors were apprehensive about Japan’s earnings results initially. Ultimately, Japan’s strong earnings prospects boosted sentiment, which in turn managed to grab the interest of foreign investors.

Foreign investment in Japan’s stocks touched 4.4 trillion yen or $39 billion in the last six weeks. This came as welcome news for the country after foreign investors sold around 2.4 trillion yen or $21 billion of Japanese stocks during the mid-July to early-September period.

Currently, it is necessary to look beyond the success of the domestic market and diversify into other markets, in particular Japan. Strong earnings performance along with improved economic conditions attracted billions of foreign investment in Japan. In this context, adding mutual funds with significant Japanese exposure to your portfolio would be a good idea.

Benchmarks Hit New Highs

The Nikkei Stock Average climbed 1.86% or 408.47 points to 22,420.08 on Nov 1, touching its peak since Jul 1, 1996. The broader Topix index also added 1.17% to finish at 1,786.71 points on Nov 1, reaching its best closing level since Jul 10, 2007. Also, the Nikkei 225 increased 2.4% for the week, registering its eighth consecutive week of gains, its best winning stretch since Japanese Prime Minister Shinzo Abe introduced Abenomics reforms in late 2012.

Upbeat earnings outlook contributed to market gains in Japan. Shares of major Japanese giants like Honda Motor Co Ltd HMC and Sony Corp SNE increased after both companies gave upbeat full-year earnings forecasts. Additionally, Tokyo Electron Ltd. TOELY, Screen Holdings Co., Ltd DINRF, Japan Airlines Ltd JAPSY and J-Power or Electric Power Development Company raised their earnings projections.

Economic Data Remains Healthy

After contracting in the last quarter of 2015, Japan’s economy expanded in the last six quarters. According to the country’s Cabinet Office Japan’s real GDP increased 2.5% in the second quarter. Also, the International Monetary Fund raised its forecast for Japan’s growth rate to 1.5% for 2017 compared with its July forecast of 1.3% expansion as exports gained momentum.

The country’s exports increased 18.1% year-over-year in August, registering its fastest growth pace in nearly four years. However, the increase in exports declined to 14.1% in September. However, economists from Japan termed this slowdown in exports as “temporary” and said that the data used to measure “manufacturing activity” in several other economies showed that Japan is undergoing a major growth phase and exports will continue to be its key economic growth driver.

Moreover, Japan’s core consumer inflation (CPI) increased 0.7% in September on a year-over-year basis, as per National Statistics Bureau data. A surge in energy prices contributed to this increase in core CPI.

Buy These 3 Japan Mutual Funds

Strong earnings outlook and encouraging economic reports clearly indicate that Japan’s economy is stabilizing. Moreover, the Nikkei 225 gained 12.5% and 15.9% over the last three and six months, respectively.

Additionally, mutual funds related to the Japan equity market also registered strong returns. According to Morningstar, the region’s equity mutual funds posted three-month, year-to-date (YTD) and one-year returns of 8.2%, 23.1% and 25.4%, respectively.

This upbeat backdrop calls for investing in three Japan mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have impressive three-month and YTD returns. They also have minimum initial investment within $5000 and low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Fidelity Japan FJPNX seeks capital appreciation for the long run. FJPNX invests a large part of its assets in securities of Japanese and other companies operating in Japan. The fund uses fundamental analysis while investing in common stocks of Japanese companies.

FJPNX has an annual expense ratio of 0.78%, lower than the category average of 1.33%. The fund has three-month and YTD returns of 7.3% and 26.3%, respectively. FJPNX has a Zacks Mutual Fund Rank #2.

Matthews Japan Investor MJFOX seeks capital growth for the long run. MJFOX invests a bulk of its assets in common and preferred stocks of companies located in Japan. MJFOX looks for companies with attractive valuations rather than focusing on specific industries.

MJFOX has an annual expense ratio of 0.98%, lower than the category average of 1.33%. The fund has three-month and YTD returns of 9.2% and 28.1%, respectively. MJFOX has a Zacks Mutual Fund Rank #1.

Fidelity Japan Smaller Companies FJSCX seeks capital appreciation over the long term. It invests most of its assets in Japanese securities or other instruments economically connected with Japan. FJSCX invests in securities of companies with market cap similar to those listed in Russell/Nomura Mid-Small Cap Index or the Japanese Association of Securities Dealers Automated Quotations (JASDAQ) Index.

FJSCX has an annual expense ratio of 0.96%, lower than the category average of 1.33%. The fund has three-month and YTD returns of 7.6% and 29%, respectively. FJSCX has a Zacks Mutual Fund Rank #1.

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