Japanese stocks are experiencing a renaissance this year, and that might be an understatement. As of June 22, the MSCI Japan Index is higher by 14.71% year-to-date, an advantage of 57 basis points over the S&P 500.
On the other hand, Japanese stocks have spent the better part of three decades lagging U.S. counterparts, meaning that some investors considering revisiting the country may not want to do so directly. Various international equity exchange traded funds allow market participants to access Japan without the commitment of a dedicated strategy. The Calvert International Responsible Index ETF (CVIE) is part of that group.
CVIE, which follows the Calvert International Responsible Index, allocates nearly 17% of its weight to Japanese stocks, making Japan the ETF’s largest country exposure by 660 basis points over second-place U.K. That’s big enough to position CVIE investors to benefit from upside in Japanese equities while muting some of the risk associated with single-country strategies.
Japan Benefits Abound
Japan’s outperformance, albeit modest, of U.S. equities this year is rooted in fundamentals, and that augurs well for CVIE. Two of the more notable fundamental factors favoring Japanese equities are strong balance sheets and rock-bottom valuations.
“Japanese companies have long hoarded cash, reaching $2.5 trillion, bloating book values but offering little return in a country where interest rates on cash remain below zero. Currently, about half of the 1835 listed firms on the Tokyo Stock Exchange have Price to Book (P/B) ratios below 1.0, including some very large, well-known companies,” according to Charles Schwab research.
The point about those price-to-book ratios is pertinent because Japanese securities regulators are pushing companies to get those ratios above 1.0 by deploying cash to repurchase shares, among other avenues of shareholder rewards.
Additionally, Japan’s economy is on solid footing compared to other major developed markets. Asia’s second-largest economy is being helped by rising inflation. While that may seem counterintuitive to U.S. investors, the point that inflation numbers in Japan exceeded forecasts for 13 consecutive months is relevant because the economy was beset by deflation for decades. That’s proving to be impactful for Japanese risk assets.
“This is the first time an entire generation of consumers and businesses have experienced sustained inflation. Previously, falling prices provided an incentive to delay consumption, which handicapped economic growth. But now, rising inflationary expectations could lead to positive changes in consumption and investment by Japanese individuals and corporations helping drive stronger growth,” concluded Schwab.
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