• Yen-Sensitive Capital Goods Stocks Underperform: The capital goods sector draws only 40% of its revenue from Japan, the rest coming from overseas.3 This 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.
• A Large Divergence between Sectors: The 10-percentage-point difference between the WisdomTree Japan Hedged Financials Index (WTJFH) and the WisdomTree Japan Hedged Health Care Index (WTJHCH) is quite large. The health care stocks, typically more defensive, have high dividend yields and have been focal points for some individual investors in the new tax-incentivized savings accounts being set up in Japan. The financials are the cheapest part of the market and could be a higher beta exposure for those who want to make a contrarian allocation in the “cheapest” part of Japan, as measured by the price-to-earnings ratios or price-to-book ratios.
Land of the Rising Sun
I believe 2013 marked the start of a multi-year bull market in equities, and this recent pullback offers an opportunity to increase under-weight allocations or add new positions. Japan is one of the lowest-priced regional markets on a price-to-earnings basis and the only market that actually had earnings outpace price gains over the most recent year.4 I believe equity markets will remain supported as Abenomics continues to gain traction and especially as Abe makes more progress on his growth strategy for Japan (the third arrow of Abenomics). While broad-based approaches should continue to serve many investors well, I believe there is also a place for more finely honed precision tools, such as sector allocations or small caps, to express specific views regarding how Abenomics will play out.
1Sources:WisdomTree, Bloomberg (04/30/14)
2Period: (12/31/13-04/30/14)
3Sources: WisdomTree, Bloomberg, as of 12/13/13
4Sources: WisdomTree, Bloomberg. Most recent year is 04/30/13–04/30/14
Important Risks Related to this Article
The Funds focus their investments in Japan, thereby increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Investments focusing on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development.