Potentially Focus on Smaller Companies for Future Domestic Growth
I believe the relationship between the Japanese large- and small-cap equity performance has been influenced by the yen’s substantial movements. Although some small-cap industries have already begun to benefit from Abe’s policies (e.g., real estate and diversified financials), I think the majority of the smaller-cap stocks have yet to fully benefit. Small-cap stocks typically export less and are more sensitive to the domestic economy than large-cap stocks. As I mentioned earlier, the structural reforms should help stimulate consumer demand, eventually benefiting smaller-cap companies.
WisdomTree Japan Small-Cap Indexes
WisdomTree has two different small-cap Indexes that track dividend-paying stocks in Japan. Although each Index provides exposure to companies that we believe are more geared toward local Japanese revenue and consumption, they have opposite exposure to currency risk.
• WisdomTree Japan SmallCap Dividend Index – includes exposure to the yen
• WisdomTree Japan Hedged SmallCap Equity Index – hedges out the currency risk
Conclusion
I don’t believe Abenomics will fade quickly on the monetary side—it has only just begun its fiscal and structural reforms. Promises have been made to focus on long-term results and to release Japanese citizens from the deflationary cycle. Although Japan’s global exporters are in favor, the focus could shift toward the more domestically sensitive firms that we see in small caps. With new options for the currency-hedged side of small caps, one can now decide on the optimal allocations—do I want the currency exposure or do I want to hedge it? I believe a number of investors may pair currency-hedged options with non-currency-hedged options to diversify their approach.
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.
1Source: Toyota FY2014 1Q Financial Results : Earnings Release Presentation (08/02/2013).