Japanese equities could make an appealing diversification option for Canadian investors, suggests National Bank Financial in a research note.

“Japanese equities have the wind in their sails. The Nikkei index recently topped 18,000 for the first time since May 2000,” NBF says, noting that the Japanese stock index has been the second best performer among G-7 markets (behind the Canadian index) with an annual return of 11.7% in local currency over the last five years.

“After such a run, should investors take profits considering that the Bank of Japan has just started removing liquidity?” it asks. “Despite the possibility of a short-term pullback, we continue to recommend an overweight position on Japanese stocks.”

“First, it is worth noting that the Japanese economy is still at the early stage of a sustainable economic expansion and benefits from the boom in Southeast Asian economies. Second, earnings are still in recovery mode and sell-side analysts forecast 12-month earnings growth of 14.2%, the strongest outlook in the G-7,” it says. “Third, from a Canadian investors point of view, the Japanese stock market offers a good diversification tool to reduce the volatility of their portfolio since the resource sectors account for only 9% of the Japanese stock market (versus 43% for the S&P/TSX).”