Market Overview

Down But Not Out: Japan ETFs Offer Value

Down But Not Out: Japan ETFs Offer Value

The Guggenheim CurrencyShares Japanese (NYSE: FXY) is up 19 percent year-to-date, making it one of the best-performing currency exchange-traded funds. So it is not surprising that as the yen surges amid safe-haven demand, Japanese stocks are struggling.

In the United States, ETFs are designed to benefit when the dollar rises against the yen, including the WisdomTree Japan Hedged Equity Fund (NYSE: DXJ), are being repudiated by investors. But, just as naysayers are apt to say currency hedged ETFs were too much of a good thing when the dollar was soaring, perhaps now is the time to revisit DXJ and friends when these funds are out of favor.

Revisiting DXJ

On the surface, many investors might criticize the lack of inflation, weak macro data and Japan’s corporate exposure to emerging markets as good reasons why Japan’s equity market should have played catch up. However, investors are ignoring a really significant divorce between Japanese earnings revisions and a number of macro indicators.

Related Link: FX Pro: Forget The Fed And Brexit, Focus On Japan

Plus, there is no denying the fact that Japan, the world's third-largest economy, is home to some inexpensive stocks.

“In our view, this is true both from an absolute and relative perspective: MSCI Japan trades on a 1.1x price-to-book (P/B) ratio, which is in the bottom 10 percent range against its long-term history and well below the 2.0x for the MSCI World Index. Japan’s trailing price-to-earnings (P/E) ratio now stands at 14.2x. This is at the very bottom 2 percent against its history and well below the 20.2x for MSCI World,” said WisdomTree in a note out Thursday.

Value And Value Traps

Of course, there is usually a fine line between “value” and “value trap.” There are instances of international markets, developed and emerging, looking inexpensive and remaining so for prolonged periods of time because investors were leery of the perceived value being offered.

Again, there are data points that bode well for Japanese stocks and ETFs such as DXJ. Those include growing dividends and rising share repurchase programs. Additionally, other metrics indicate DXJ could be a credible value play, not a value trap.

“While valuations are very attractive, performance ratios appear less so: Japan’s return on equity (ROE) stands at 8 percent, which is not just below the 9 percent of the MSCI World but also at the 68 percent percentile mark—high by historical standards measured against its own history. Ditto for the dividend yield, 2.5 percent currency, which is in the 93rd percentile compared to its history,” added WisdomTree.

For advisors and investors that like their wisdom simple, just remember the old investing maxim about buying when there is blood in the streets and doing the opposite of the herd. Not many investors are currently fans of Japanese stocks, which is almost an engraved invitation to embrace DXJ.


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