Finding Value In Japanese Stocks [iShares Trust, iShares MSCI Japan ETF, iShares MSCI Jpan Smll Cap Ind Fund(ETF)]

japanese GDP growthJapanese equities were a favorite among investors in 2013. This year, it seems the appeal is starting to cool. March saw $0.7 billion in Japanese equity outflows, representing the first monthly redemptions in two years. The chart below illustrates ETF flows by region since January 2013; the red portion represents Asia Pacific flows, which are primarily driven by Japan equity exposures.ETF Flows by Region

The outflows are due in part to this month’s planned sales tax increase, which is expected to spark an economic contraction in Q2. Still, we think investors may find value in Japanese equities.

As my colleagues note in Rising Sun, Setting Sun, a special report from the BlackRock Investment Institute, there are several key events and processes that can help Japan to escape economic stagnation.

  1. Wage growth. This is a necessary part of restoring inflation. Wages are not keeping up with rising prices, which is taking a toll on consumer sentiment. We continue to monitor spring wage negotiations between large Japanese companies and unions.
  2. Private sector cooperation. Prime Minister Shinzo Abe’s efforts to evade deflation and revive the nation’s economy, (referred to as “Abenomics”), have thus far helped Japan find more stable ground. Monetary easing and fiscal consolidation have coaxed Japan’s economy toward stability; the private sector must take it from here.
  3. Bank of Japan (BoJ) support. The nation’s central bank seems committed to its goal of reaching 2% inflation, aiming to continue its monetary easing plan for the next two years or so.
  4. Lower valuation of the Japanese yen. As Russ Koesterich notes in his latest Investment Directions, “global sentiment remains a major source of risk for both the yen and Japanese stocks, the United States’ and Japan’s divergent monetary policy paths will likely place downward pressure on the yen”. This should, in turn, help support corporate earnings.

The report also points to the potential for Japan’s equity market to be bolstered by local investors. The nation’s $1.26 trillion Government Pension Investment Fund (GPIF), which is the world’s largest public pension fund, has revised its investment allocation by trimming bond exposure in favor of equities. As of April 1, 2014, the fund’s core allocation limits its exposure to Japanese stocks to a maximum of 18%, and holds 17% as of December.

Pages: 1 2

Leave a Reply

Your email address will not be published. Required fields are marked *