Market Overview

Where Value Stocks Are Working

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Where Value Stocks Are Working

On the back of a stellar November jobs report, stocks raced higher Friday, reminding investors that U.S. equities are still the place to be and that value stocks have a long way to go to catch-up to their growth and momentum rivals.

For investors bold enough to defy those trends, and there could be some reward in doing that, Japan could be the way to go. The iShares MSCI Japan Value ETF (NASDAQ: EWJV), which debuted in March, hit a record high last Friday, extending its since inception gain to 10%.

On their own, Japanese stocks are significantly less expensive than U.S. equities, a scenario heightened by EWJV's value emphasis.

Why It's Important

With seemingly everyone preaching about the strength of U.S. stocks in 2019 and rightfully so, Japan's steady performance is going almost overlooked. The MSCI Japan Index is higher by more than 18% and some market observers believe Japanese stocks can continue climbing in 2020.

“An expected recovery in Japanese corporate earnings will drive their stock prices higher, predicted Morgan Stanley, UBS, and Nomura,” reports CNBC. “That comes after two consecutive years of earnings declines in Japan, due largely to a stronger yen and U.S.China trade tensions, said UBS.”

EWJV tracks the MSCI Japan Value Index and holds 178 stocks with a heavily cyclical tilt that levers the fund to a recovery in Japan's local economy as well as an uptick exports. For example, the fund devotes almost 43% of its combined weight to the consumer discretionary and industrial sectors.

What's Next

“Economists from Morgan Stanley have even forecast zero growth in Japan in 2020. But the bank’s equity analysts said ‘positive structural trends’ in the country — such as improving corporate governance and profitability — could help Japanese stocks to maintain or increase their value,” according to CNBC.

Adding to the case for EWJV in 2020 are several factors, including expectations that the dollar will appreciate against the yen, bolstering Japanese exporters; and the strong balance sheets found among Japanese large caps.

Cash-rich Japanese companies are providing some of the highest buybacks and most robust dividend growth in the ex-US developed world, trends that should continue next year. EWJV yields just 2.88%, implying room for payout growth.

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