After a strong rally, investors are looking through various areas for cheap opportunities that have lagged behind. One area to consider is Japan’s markets and country-specific exchange traded funds.
“Value stocks look especially attractive in Japan relative to world markets,” Tsukasa Tokikuni, head of value investor Orbis Investment Management Ltd.’s Japanese unit, told the Wall Street Journal, adding that the firm has about $6 billion invested in the Japanese stock market and holds an overweighting of Japanese stocks in its global fund.
Investors interested in Japanese stocks have paid less per dollar of profit in recent years. The Nikkei 225 index current trades at 14.5 times the company’s projected earnings per share. In contrast, the S&P 500, the same figure is 20.1. The iShares MSCI Japan ETF (NYSEArca: EWJ), the largest Japan-related ETF, also trades at a 14.3 price-to-earnings.
The Japan market discount especially stands out because Japanese investors earn virtually nothing on bonds where yields were even trading in the negative territory, whereas U.S. investors can generate nearly 2% on a 10-year Treasury note. Consequently, more are looking into dividend-paying stocks but with some caution.
“There are some companies that are a value trap,” UBS analyst Chisa Kobayashi told the WSJ, advising investors to look at those that haven’t lowered dividends in the last 15 years since these companies will likely “show their strength when the market turns down.”
Alternatively, ETF investors may consider smart beta or factor-based strategies that hone in on quality names. For example, the Deutsche X-trackers Japan JPX-Nikkei 400 Equity ETF (NYSEArca: JPN) tracks the JPX-Nikkei 400 Index, which employs a rigorous screening process based on return on equity, cumulative operating profit and market capitalization to select high-quality, capital-efficient Japanese companies.
The First Trust Japan AlphaDEX Fund (FJP) tracks an “enhanced” index that ranks Japanese companies based on growth factors including 3-, 6- and 12- month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets.
Additionally, the Goldman Sachs ActiveBeta Japan Equity ETF (GSJY) provides Japanese equity exposure to an index with four distinct performance attributes, including good value, strong momentum, high quality and low volatility.
For more information on the Japanese markets, visit our Japan category.