Japan ETFs Attract Value Investors
March 27th, 2014 at 1:59pm by Tom Lydon
Exchange traded funds tracking Japanese stocks have been among the worst performers this year as a number of internal and external factors weigh on equities in the world’s third-largest economy. Now, some are looking at the inexpensive valuations on Japanese stocks.
“The selloff in that market makes an interesting and attractive entry point,” Marc Desmidt, head of alpha strategies for BlackRock Asia Pacific, told CNBC. “Valuation remains very attractive.”
The benchmark Nikkei index declined 11% so far this year. The WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) has declined 10.3% year-to-date while the iShares MSCI Japan ETF (NYSEArca: EWJ) dropped 9.0%.
Looking at valuations, DXJ’s portfolio shows a price-to-earnings of 13.2 and EWJ’s portfolio shows a price-to-earnings of 13.8, according to Morningstar data. Nomura data reveals that Japaneses equities have a 12.9 times 12-month forward earnings, or a 27% below its long-term average. In comparison, the S&P 500 Index has a price-to-earnings of 16.
Desmidt believes that Japanese earnings will improve as the yen continues to weaken against the U.S. dollar and as the government cuts corporate taxes. [WisdomTree: Progress on Abe’s Third Arrow Policies: From Savings to Investment]
However, some still remain cautious on Japanese equities. For instance, Goldman Sachs cut its three- and six-month targets for the Topix index due to “unanticipated weakness” this year and limited short-term catalysts. [Japan ETF Investors Wait for Further BOJ Guidance]
Specifically, Japan’s weakness is attributed to headwinds from weaker U.S. data, China’s growth and geopolitical tensions in Ukraine. Within Japan, the government is about to enact a consumption tax increase and domestic investors are still sitting on the sidelines.
Nevertheless, Goldman Sachs remains optimistic over the longer term, predicting earnings per share to increase 21% in the current fiscal year.
“Japan remains the only major market with positive earnings revision momentum,” Goldman Sachs said.
iShares MSCI Japan ETF
For more information on Japan, visit our Japan category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.