As Abenomics is transmitted to local Japanese consumers, the constituents in Japan SmallCaps Unhedged might be directly sensitive to the changing landscape of increased aggregate demand in Japan.
Significant Performance Difference—Not a Fluke!
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• Small Caps Have Long-Term Edge: While the short-term performance has been encouraging for Japan SmallCaps, it’s not unique to 2014. Going back over longer periods such as three and five years, Japanese small caps outperformed the MSCI Japan Index by over 3 percentage points per year.
• What about Drawdowns and 2008? Many look at 2008 performance as a test of how a strategy performs in a difficult market. Japan SmallCaps Unhedged was down 17.4%, whereas MSCI Japan was down 29.21%. For context, the S&P 500 Index was down 37% during the same period.
Conclusion: Local Japanese Small Caps vs. Large Global Firms Based in Japan
Abenomics is geared toward improving overall economic conditions in Japan to promote long-term growth. However, Japan’s economy—especially seen through many of its large-cap equities—is heavily integrated into the global economic landscape. For those looking to more purely express a view on the development of Abenomics in Japan, small caps offer an interesting option. And the outperformance of small caps over large caps in 2014 suggests that Japan’s large-cap markets are being driven more by the global environment than the local economy.
1Refers to the TOPIX, 12/31/13–5/31/14.
2Refers to the Russell 2000 Index.
3Sources for entire paragraph: WisdomTree and Bloomberg, with data from 6/1/06 to 5/31/14.
4Source: Bloomberg, as of 5/31/13, using most recent completed annual geographic revenue screening for Japan.
5Source: Bloomberg, as of 5/31/13, using most recent completed annual geographic revenue screening for Japan.
Important Risks Related to this Article
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments focusing on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development.Investments focused in Japan are increasing the impact of events and developments associated with the region, which can adversely affect performance.