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Japanese shares could win a rare gold medal this month, on course to become the world’s best performing market, as foreign investors piled in on hopes for economic stimulus, improving vaccine rollouts and expectations of a new prime minister.

The MSCI Japan is up 6.0% this month, by far the best performance among major markets.

MSCI’s gauge of both U.S. and European markets have fallen more than 1% while emerging markets have lost more than 2.5%.

Japanese shares have been long overlooked by global investors as Japan’s slow economic growth, unfavourable demographics and eroding competitiveness in the tech sector prompted them to seek higher returns elsewhere.

Unpopular Prime Minister Yoshihide Suga’s sudden offer of resignation on Sept 3, however, triggered massive foreign fund inflows to the market.

Investors bet a new leader will be more popular and will easily win an upcoming election that must be held by November. There are also expectations for a new stimulus package to support households and businesses hit by the pandemic.

Data from Japan Exchange Group showed foreign investors have poured about two trillion yen in the last three weeks.

“For many of our investors, Japan is a very low holding. Many of our clients are holding just 0%, 1% or 2% of portfolios in Japan. But in a global equity benchmark, Japan should be more like 6%. So we have a lot of potential upside from an ownership perspective,” said Kiran Ganesh, managing director at UBS Global Wealth Management in London.

“In terms of catalysts, we think we will see more fiscal stimulus coming after the election... Overall, there’s a lot to like about the Japanese market at the moment, it’s been most preferred for us for a few months now.”

To be sure, exchange data shows recent buying was mainly made with futures, rather than cash equities, suggesting it was led by short-term speculators rather than long-term investors.

Some investors also said they have not changed their position on Japanese equities in recent weeks.

BlackRock, the world’s largest asset management firm, for instance, said its position on Japan remains neutral after upgrading it in early July.

Still, some other fund managers said they have a positive view on the market.

Mary Nicola, global multi-asset portfolio manager at PineBridge Investments in Singapore, said hopes for reform could accelerate if Taro Kono, the administration’s reform minister, wins the Liberal Democratic Party leadership election next week.

“The three prospects we see for Japan are: firstly, catching up to other markets as vaccinations progress; second, politics with upcoming elections on Japan’s reform agenda; and finally, the global shortage in the semiconductor cycle, which is likely to pick up and support their auto industry.”

-- Hideyuki Sano and Tomo Uetake of Reuters

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Stocks to ponder

Tourmaline Oil Corp. (TOU-T) The Calgary-based natural gas producer – despite the name, its revenue from natural gas is about 10 times the revenue from oil production – has been delivering impressive returns this year, even without factoring in dividend payouts. The stock is one of the top performers within the S&P/TSX Composite Index this year, and a surge in natural gas prices points to more good times ahead - especially for those investors looking for income. David Berman tells us more.

IBI Group Inc. (IBG-T) This is a top-performing small-cap industrials stock whose share price is up 37 per cent year-to-date. The Street remains bullish on IBI, with a unanimous buy recommendation from eight analysts and a 12-month forecast return of 32 per cent. Jennifer Dowty takes a look at the investment case for the company, and tells us about the next potential catalyst that could bring a significant stock rally.

The Rundown

Short sales on the TSX: What bearish investors are betting again

Stocks are near record levels of valuation as markets head into the most volatile months of the year. Is it time for the short sellers’ famine to turn into a feast? Larry MacDonald takes a look at what companies are targeted by this bearish group as of mid-September. If any are in your portfolio, you might want to double check your thesis.

How Canada is exposed to ripple effects of Evergrande debt crisis

Canada’s largest pension funds and banks have limited direct ties to the Evergrande Group debt crisis, a Globe and Mail review of their investment holdings shows, but there’s little question the Chinese company’s collapse would have painful knock-on effects, even if those indirect reverberations are difficult to quantify.

Clean tech in focus as stock market awaits German election

Germany’s upcoming national election is likely to show the most fragmented outcome in decades and markets could struggle to work out the implications for stocks, with one exception: if you score low on green technology you face trouble. As Reuters reports, this could impact some big-name German stocks that Canadian investors may have exposure to.

Others

Number Cruncher: These 12 semiconductor stocks are helping to power sector’s rally

Number Cruncher: 12 low-volatility ETFs for investors wary of market turbulence

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Thursday’s Insider Report: Multiple C-suite executives are buying this beaten-down stock

Big surge in TSX dividend payouts ahead: BMO

Wall Street eyes four more years for Powell at Fed

Globe Advisor

Big picture appeal of Chinese assets remains strong

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Ask Globe Investor

Question: I have been considering simplifying my portfolio by reducing the number of stocks I own and transitioning into more exchange-traded funds. I have looked at several such as XGRO, ZGRO and HGRO, all of which are essentially a “fund of funds”. The quoted management expense ratio (MER) for these ETFs is quite low, but I wonder if the quoted figure also accounts for the MERs of the underlying funds?

Answer: When you invest in an ETF that holds other ETFs, you pay only the MER of the fund you own directly. Securities laws prohibit fund companies from double-dipping on expenses.

As an example, the iShares Core Growth ETF Portoflio (XGRO) holds eight other stock and bond index ETFs, with MERs ranging from 0.03 per cent to 0.22 per cent. You would only pay XGRO’s own MER of 0.20 per cent, which includes the fund’s annual management fee, administrative costs, marketing, taxes and other expenses.

--John Heinzl

What’s up in the days ahead

Should value investors be wary of inflation? Dr. George Athanassakos will have some words of encouragement.

‘Auf Wiedersehen Merkel, hallo...?’ and other world market themes for the week ahead

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff

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