Since euro QE began in earnest at the beginning of March it seems we've heard nothing but the positive merits of investing in Europe now that the central bank has finally stepped up to the plate and delivered long overdue unconventional monetary stimulus. All of a sudden European stocks are cheap and poised for a real rally, or so the logic goes. The only problem with that argument is that European stocks really aren't that cheap (as we noted in Getting Our Arms Around European Equity Valuations) and the euro has fallen more than European stocks have risen so to foreign investors the rally in Europe has been a wash, if not worse.
Fortunately, one of the great thing about investing is that there is always an alternative move to make. We think the better play at this point is to focus one's energy on Japan, where the real breakout is happening. Indeed over the last three months Japanese stocks have outperformed the MSCI All Country World Index (ACWI) by almost 4% in USD terms and over the last year Japan has outperformed by more than 8% (charts 1 & 2 show the relative performance of MSCI Japan vs the ACWI). Compare this stellar performance to European stocks, which have market performed over the last three months, underperformed by 2% since QE started, and have underperformed by by 11% over the last year (charts 3&4 show the MSCI Europe vs the ACWI). Further, from a technical perspective Japanese stocks have etched out a nice relative performance base over the last year (an important chart feature) while European stocks have remained in a persistent downtrend. In short, we think the QE in Europe is noise and investors should focus on the signal being given by the performance of Japanese stocks.