“I’m in Tokyo right now, and I feel like I’m in Italy in the 1990s while reading it. [currency crisis]says manager Shuntaro Takeuchi of the
funds (ticker: MJFOX). “Everything is incredibly cheap.”
The Japanese yen fell to a more than 20-year low against the US dollar this month, making Japanese-made goods and stocks cheaper in US dollars. This is the reason why the Tokyo stock price index, or Topix, fell only 7.2% in yen terms in 2022, but the popular
iShares MSCI Japan
The exchange-traded fund (EWJ), which is denominated in US dollars, is down more than 20%.
Yet there are good reasons to find Japanese funds attractive today. While global stock markets have fallen due to inflationary concerns, Japan has struggled with deflation for decades. Some portfolio managers view the outlook for Japanese inflation as good news.
In Japan, “prices have gone down partly because they were extraordinarily and unsustainably high in the 1980s,” says Drew Edwards, director of the
GMO-Usonian Japan Value Creation
funds (GMAHX). “But it’s set up this deflationary spiral that we’ve seen over the last three decades.” The mindset of Japanese consumers and leaders, he said, was “Why would I buy a house today when it will be cheaper next year?”
Now, due to rising oil prices and pandemic supply chain bottlenecks, prices in Japan are finally rising, which is expected to boost domestic growth. Although there has been political pressure on the Bank of Japan to raise interest rates to fight inflation, many say that won’t happen. “Inflation remains relatively low in Japan, around 2%, which is the Bank of Japan’s target,” said Daniel Hurley, portfolio specialist at the Bank of Japan.
T. Rowe Price Japan
funds (PRJPX). “That’s why they said, ‘We’re not changing our monetary policy.‘ ”
|Fund / Symbol||Cumulative return since the beginning of the year||3 year return||Back to 10 years||Expense ratio||P/E ratio|
|Value Creation GMO-Usonian Japan / GMAHX||-16.0%||N / A||N / A||0.78%||9.9|
|Hennessy Japan / HJPNX||-32.0||-3.8%||8.0%||1.43||18.7|
|iShares MSCI Japan / EWJ||-20.1||0.5||5.5||0.50||12.4|
|iShares MSCI Japan Value / EWJV||-10.3||1.4||N / A||0.15||9.6|
|T. Rowe Price Japan / PRJPX||-31.5||-2.6||7.0||0.96||18.8|
|WisdomTree Japan SmallCap Dividend / DFJ||-15.9||-1.8||5.7||0.58||8.0|
Note: Returns through July 12. Three- and ten-year returns are annualized. P/E ratios are for the last 12 months. N/A=not applicable
Sources: Morningstar Direct; the morning star
Even so, Japanese equities behaved as if rates had risen. Normally, when rates rise, expensive growth stocks fall the most because they promise profits in the distant future, while bonds pay their returns up front. The higher the yield on bonds, the less willing equity investors are to wait for the promised growth. Japan’s zero rate policy is also keeping the yen cheap as investors sell the currency’s bonds to buy higher-yielding US bonds.
Despite all this, the growth-value dichotomy of performance persists in Japan. Through June 30, the MSCI Japan Growth Index is down 30% in US dollars compared to the 9.6% decline in the MSCI Japan Value Index. This hurt growth-focused T. Rowe Price Japan and Matthews Japan, which were down 31.5% and 28.8%, respectively, in 2022. Value-focused GMO-Usonian was down 16%.
Unfortunately, the GMO fund is only available to institutional investors, while the other 10 active mutual funds in Japan generally lean towards growth. However, there are value-oriented ETFs:
iShares MSCI Japan Value
WisdomTree Japan SmallCap Dividend
(DFJ), down 10.3% and 15.9%, respectively, this year. GMO’s Edwards points out that Japanese small-cap value stocks are currently trading at a 43% discount to large-caps, when historically their discount has averaged 27%. Indeed, the WisdomTree ETF has a very cheap average price-to-earnings ratio of eight for its portfolio, according to Morningstar, about half that of the S&P 500 index.
Growth stocks will eventually come back. But for now, cheaper export-oriented companies have benefited from the weaker yen, making their products more attractive to overseas buyers. “In this current market, some poor quality products [Japanese] exporters saw their profit margins drop from 2% to 5% because the currency got so weak,” says Hurley of the growth-focused T. Rowe Price Japan fund. “This type of environment was a real challenge for us. But as the economy stabilizes, it will be a much more favorable environment” for growth stocks.
Hurley refers to a company as
(6861.Japan) – a maker of industrial sensors and scanners down 33% in 2022 – as a beneficiary of inflationary trends around the world, calling it “one of the best factory automation companies in the world”. world”. Wage inflation and an aging workforce in developed countries will drive manufacturers to automate to cut costs and replace retiring workers, he says.
By design, T. Rowe’s fund invests about 75% of its portfolio in growth companies and 25% in value turnaround stocks. An example of the latter would be the Wireless Society
Japanese telegraph and telephone
(9432.Japan), which trades for 12 times its earnings and increased its dividend after a corporate restructuring.
Other managers have fine-tuned their portfolios to give them greater exposure to value. They buy “growth stocks in disguise,” like director Masakazu Takeda of
(HJPNX) calls them. He likes
(6501.Japan), which has a P/E ratio of 11. “Hitachi is a century-old industrial conglomerate,” he observes. “It was a very poorly run business until 2008 when the financial crisis hit them hard.” Subsequently, the company “pulled itself together” by shifting its business model from selling hardware to software and information technology.
(SONY) for similar reasons. Investors see it primarily as the hardware maker of PlayStation, but underestimate the growth potential of its digital content at Sony Music and Sony Pictures, which owns the Spider-Man movie franchise.
“Digital [content]is the global growth area across the world,” he says. “But Sony is still considered a hardware company. So it’s still trading at a significant discount, compared to the Disneys of the world.” Sony’s P/E is 16, and
Sony and the yen could both rally, two ways US-based investors in Japan can gain.
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