Japanese markets and country-specific exchange traded funds retreated Tuesday, but contrarian investors may find that the pullbacks are opportune and cheap entry points into a growing economy.
Poor Chinese data pressured Asian equities Tuesday, with the iShares MSCI Japan ETF (NYSEArca: EWJ) down 4.2% and Deutsche X-trackers Japan JPX-Nikkei 400 Equity ETF (NYSEArca: JPN) 4.9% lower.
Additionally, the currency-hedged Japan ETF options were also falling off on a stronger yen currency. On Tuesday, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) fell 5.3%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) dropped 5.4% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) declined 5.7%.
Asian stocks, especially Japan’s market, plunged after a fresh set of weak Chinese manufacturing data weighed on the neighboring economies.
However, Peter Oppenheimer, the chief global equities strategist at Goldman Sachs, argues that investors should use the latest bout of market volatility to bulk up on Japanese equities, reports Matt Clinch for CNBC.
Specifically, Oppenheimer pointed to improvements within the economy for the first time since the 1980s, which have translated to better equity valuations, compared to the U.S.
“Valuations are not that extreme there (in Japan), so I think you’ve got the combination of a tailwind from policy and from the currency – but actually some real fundamental improvements from corporate profitability,” Oppenheimer told CNBC.
For instance, corporate capital expenditure jumped 5.6% in April through June year-over-year.
George Boyd-Bowman, manager of the Neptune Global Income fund, also pointed out that Prime Minister Shinzo Abe’s third arrow is tackling structural reforms, notably among corporates, and pushing more firms to increase share buybacks and dividend payouts, reports Emma Wall for Morningstar.
Looking at equity valuations, Japanese stocks look cheaper than the U.S. For instance, EWJ shows a 16.0 price-to-earnings ratio and a 1.4 price-to-book, whereas the S&P 500 index is trading at a 18.7 P/E and a 2.5 P/B.
“From an equity market perspective, we’re looking at relatively flat returns and still some high volatility in the near term but I should be clear, if we take a 6 or 12 month view, we think you’re going to see some pretty good progress in equity markets. And over that horizon we would see the best returns in Europe and Japan,” Oppenheimer said. “That’s where the valuations are the most supportive and we’ve still got a reasonable improvement in profitability. And it’s in those markets, I think, people should be looking to accumulate into volatility weakness in the near term.”
Furthermore, Bob Janjuah, a Nomura strategist, pointed out that central bank policy could further support Japanese equities as the Bank of Japan could “go again” and produce another round of quantitative easing to mitigate deflationary concerns. Consequently, the Japanese yen could further depreciate against the U.S. dollar.
For ETF investors, currency-hedged Japan ETF options may be a better play to hedge against the negative effects of a depreciating yen while capturing potential growth from loose monetary policies.
iShares MSCI Japan ETF
For more information on the Japanese market, visit our Japan category.
Max Chen contributed to this article.