An Upbeat Outlook for Japan ETFs

Japanese equities and country-specific exchange traded funds have suffered through the recent global sell-off, but the developed Asian market could turn around and end the year on a high note.

Year-to-date, the iShares MSCI Japan ETF (NYSEArca: EWJ) fell 10.6%, Deutsche X-trackers Japan JPX-Nikkei 400 Equity ETF (NYSEArca: JPN) dropped 9.8% and iShares JPX-Nikkei 400 ETF (NYSEArca: JPXN) is 10.0% lower.

The CurrencyShares Japanese Yen Trust (NYSEArca: FXY), which tracks the movement of the Japanese yen against the U.S. dollar, gained 7.2% so far this year, with the U.S. dollar trading at ¥111.7, as traders turned to safe-haven assets.

Meanwhile, currency hedged ETFs, which diminished the negative effect of a weaker yen currency, underperformed non-hedged funds. For instance, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) decreased 17.7%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) retreated 17.1% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) declined 17.1%.

Nevertheless, Stephen Parker of JPMorgan Private Bank argues that Japanese market could stage a huge comeback and end 2016 in the green, reports Stephanie Yang for CNBC.

Parker points out that the corporate environment is experiencing a “major change” as executives prioritize shareholder returns, which could lead to greater dividends and share buybacks. Japanese firms have hoarded almost three times as much cash as a percentage of market cap, compared to U.S. companies, and they are on track for a record-breaking year of buybacks, according to Parker.

Japan has also created a new index to capture this new group of more pro-active companies. The JPX-Nikkei 400 Index was launched in January 2014 as a means of revitalizing the Japanese equity market. The Index employs a rigorous screening process based on return on equity, cumulative operating profit and market capitalization to  select high-quality, capital-efficient Japanese companies.

Japan “is now delivering some of the best earnings growth in the world. And if you think about a world where overall economic growth is pretty slow, you want to focus on markets where you can actually see companies do things to improve margins and deliver on earnings growth,” Parker told CNBC.

Looking ahead, Parker anticipates Japanese earnings growth of 5% to 10%, and given the recent sell-off, the strategist argues that the current environment provides a cheap buying opportunity.

“The markets are actually some of the cheapest we’re seeing anywhere,” Parker added.

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. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.

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