It wasn’t so long ago that Shinzo Abe’s government had investors feeling optimistic about Japan. Then as economic reforms and momentum seemed to get stuck and the yen strengthened, the honeymoon period ended. Japan ETFs have felt the pinch: the iShares MSCI Japan ETF and the WisdomTree Japan Hedged Equity Fund have experienced net outflows of $4 billion and $5 billion year-to-date, respectively, putting them among 2016’s biggest ETF redemptions.
However, a report on ETF.com suggests that a turnaround may be on the way. With Abe’s coalition winning a majority in the upper house in the recent election, Japanese equities have been rallying sharply this week. The yen has also given up ground, and Abe has reportedly promised to “use his victory to push forward with his economic reform program.”
When asked whether this turnaround should make Japan an attractive market for investors, three ETF experts expressed support with reservations.
Scott Kubie, chief strategist at CLS Investments in Omaha, agrees that the current conditions and outlook are attractive, though the yen’s volatility is a concern. “[Japan’s] currency gets bounced around more than most because some speculative investors use it as the preferred borrowing currency for leveraged investments,” he explained. “That means the yen tends to rally in the initial stages of market declines.”
Dave Garff of Accuvest Global Advisors in California has maintained a generally positive perception of Japan, though he is less optimistic. “We are still overweight Japan, although less so than we were six months ago. Relative momentum there has been abysmal, but fundamentals of Japanese stocks have been stronger than expected. Valuations are still reasonable.”
Tyler Mordy, president and chief investment officer of Toronto-based Forstrong Global, says Japan is at a crossroad. He perceives an early failure of Abenomics that may be redeemed by a reinforced mandate and a post-election pledge to double down on the signature policy stance. He also observes that corporations there are now “extremely lean and efficient”; “aggregate Japanese return on equity has been trending upwards”; valuations are extremely enticing; and there’s increased sentiment towards investment, as opposed to simple saving, among its citizens.
Canadian investors who feel sufficiently assured of a Japan turnaround currently have seven Japan total-market ETFs to choose from, with the iShares MSCI Japan ETF and the WisdomTree Japan Hedged Equity Fund being the two biggest players.
The real Asian market threat
BlackRock sets sights on Japan