Approach Japan Equities with Caution via a Multifactor Approach

The third-largest economy in the world is certainly feeling the pangs of the coronavirus effects in the global markets. Nonetheless, Japan still serves as a way to obtain diversification via international equities exposure that investors can still use, but must exercise caution—one way is via a multifactor approach.

Obviously, the wild card of coronavirus remains as “a spike in the yen and drop in Tokyo stocks – against a backdrop of oil price cuts that are playing havoc with financial markets – add to woes for an economy which is contending with an October sales tax hike to 10% from 8%, as well as slumping tourism and supply chain disruption caused by the health crisis,” per a N.Y. Times report.

The U.S. Federal Reserve’s recent 50-basis point rate cut didn’t quell the fear in the capital markets, and a similar move by Japan will probably yield a similar result.

“Japan’s economy is already in recession, and there are emerging signals that the worst has yet to come,” said Mizuho Securities senior market economist Toru Suehiro. “There’s not much the Bank of Japan (BOJ) can do as monetary easing cannot cure the disease. The least the government and the BOJ can do is to prevent the negative psychological effects of the epidemic from spiraling further.”

In times like this, investing with a defensive and value-oriented mindset is particularly important when it comes to investing abroad. Investors can look to alternatives like international market exposure, which presents a value proposition instead of understanding the risks.

^MSJP Chart

^MSJP data by YCharts

However, exchange-traded funds (ETFs) using a multifactor approach to international markets can help address those risks and provide a low volatility safe haven, while still getting exposure to countries like Japan. For example, the WisdomTree Japan Multifactor Fund (BATS: JNMF) seeks income and capital appreciation by investing in Japanese equity securities with the highest potential for returns based on proprietary measures of fundamental factors, such as value and quality, and technical factors, such as momentum and correlation.

With JNMF, investors can:

  • Gain targeted multifactor exposure to Japanese equities, while dynamically hedging currency risk.
  • Use to strategically seek alpha and help reduce risk as a core holding over longer time horizons.
  • Use to help lower the cost of active managers through systematic factor exposures.

The Fund’s objective changed effective March 29, 2019. Prior to March 29, 2019, Fund performance reflects the investment objective of the Fund when it tracked the performance, before fees and expenses, of the WisdomTree Dynamic Currency Hedged Japan Equity Index.

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