From its peak in January, the Hang Seng Index has retracted by about 20 percent this year. Year to date, Japan and India are the only two stock markets in Asia-Pacific that have maintained positive performance in US dollar terms. Moreover, currency issues from Venezuela to Turkey, to Indonesia and Malaysia have likely weakened sentiment for emerging markets.
As many of these news events are still progressing, we expect the emerging markets to continue to underperform major developed markets over the next several months. In Asia-Pacific, we believe that Japan and Australia remain the best opportunities for investors looking to reduce short-term newsflow risk.
Japan, on the other hand, may be worth investor attention as the emerging markets reorient themselves. Over the last five years, improved fundamentals have sustained favorable performances in the Japanese stock and real estate markets, and we believe that this trend may continue, as multiple economic indicators have sustained positive performance since 2012.
Tourist arrivals, for example, have grown from about 9 million arrivals per year in 2012 to over 28 million in 2017. The monthly arrivals in 2018 have also recorded double-digit growth year-over-year. In addition, this growth has been relatively balanced, with its top source of arrivals split quite evenly among China (25.6 percent), South Korea (24.9 percent), Taiwan (15.9 percent) and Hong Kong (7.8 percent).
In recent years, in fact, someone on my social media accounts would be visiting Tokyo or some other Japanese city almost every time Hong Kong is having a public holiday and a long weekend, and I have heard friends meeting for dinner in Japan because they just happen to be in the same city at the same time.
Sustained growth in tourist arrivals improves business sentiment because of its direct impact on the hotel and retail sectors. As tourist arrivals grow, hotel occupancy will grow as well. New hotel projects, such as those commissioned in anticipation of the Tokyo Olympics 2020, will also find it easier to become viable. Similarly, tourists would need retail outlets for food and beverages, shopping, and other goods and services. Thus, a sustained growth in tourist arrivals would lead to retail sales growth, which would incrementally improve inflation and generate additional demand for retail space.
The 2020 Olympics has prompted the Japanese government and businesses to invest in Tokyo’s infrastructure. So far, the investment has paid off as the additional tourist arrivals and improved domestic sentiment support the enlarged capacity. We recognize that economies often see a downturn after the quadrennial games, but this time may be an exception as few other economies have seen demand growth of similar magnitude.
Thus, as emerging Asia navigates through currency weakness and other geopolitical issues, Japan may well be the safe haven over the next several months. We think that investors have both short and long-term reasons to consider a diversification to Japan.
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