Investors looking to deal with the summer doldrums while remaining long equities might be able to do so with the help of familiar developed market and it is not the U.S.
Struggling Japanese stocks and the corresponding exchange traded funds could be cures for the summertime blues due to attractive valuations. This year’s plunge for the Nikkei 225 has the Japanese benchmark trading at 15.9 times forward earnings, making it slightly cheaper than the S&P 500, reports Michael P. Regan for Bloomberg.
It is not often that Japanese stocks trade at discounts to their U.S. counterparts. In 2012, Japanese stocks were less expensive than U.S. shares for five months, according to Bloomberg. That preceded an epic rally in Japanese equities that helped make the iShares MSCI Japan ETF (NYSEArca: EWJ), WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the db X-trackers MSCI Japan Hedged Equity Fund (NYSEArca: DBJP) three of last year’s best-performing developed market single-country ETFs. [Slumping Yen Lifts Japan ETFs]
The yen has been boosted this year by safe-haven demand, sending the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) higher by 1%. Still, some investors see opportunity with Japanese stocks. [Yen ETF Gets a Safe-Haven Lift]
Oppenheimer ranks Japan as the most attractive of 30 countries and forecasts the Nikkei 225 imply significant upside from current levels, according to Bloomberg.
There is speculation Prime Minister Shinzo Abe and the Bank of Japan could unleash additional quantitative easing to foster further confidence in the Japanese economic recovery. More QE could depress the yen, an important factor when evaluating Japan ETFs.
Last year, the currency hedged DXJ and DBJP posted an average gain of 41.5% while EWJ, which does hedge USD/JPY fluctuations, was up 26%.
“While prices have fallen, earnings expectations have actually increased over the period, so every dollar of earnings from Japan has gotten cheaper. The estimated price-to-earnings ratio is currently 11.7x and 12.9x for the WisdomTree Japan Hedged Equity Index (WTIDJH) and TOPIX, respectively. For perspective, the S&P 500 index is currently trading at 16.0x estimated earnings, over a 36% premium compared to WTIDJH and a 24% premium to the TOPIX,” said WisdomTree Research Director Jeremy Schwartz in a recent note. [Why The Sun Will Still Rise in Japan]
As Schwartz notes, the export-dependent capital goods sector in Japan “is a higher beta sector, and it did decline more than the TOPIX or WisdomTree’s broad-based Japan Hedged Equity Index. This reflects, in my view, yen sensitivity and global growth concerns (i.e., China) more than concerns over Japan’s local economic performance.”
That sector could offer significant upside if the yen falls and investors can play that theme with the new WisdomTree Japan Hedged Capital Goods Fund (NYSEArca: DXJC). DXJC, which debuted last month, is a direct play on a weaker yen and global auto demand as Toyota (NYSE: TM), Honda (NYSE: HM) and Nissan combine for about 22% of the new fund’s weight.
WisdomTree Japan Hedged Equity Fund
