ETF: The case for investing in Japan

Kristia van HeerdenETF Blog, Latest

If exposure to Asia is what your portfolio lacks, your options within the South African tax-free investment environment are limited. Japan might no longer be the economic powerhouse of yore, but the Deutsche Bank MSCI Japan ETF offers local investors an opportunity to get great value at a good price, says Galileo Capital’s Warwick Lucas.  

Hint: Outside of the tax-free environment, the Deutsche Bank China ETN offers more exotic exposure. Read Nerina Visser’s view on the investment case for China here.

investing in JapanDeutsche Bank MSCI Japan ETF gives investors exposure to 319 Japanese companies, including some of Japan’s biggest exports. Heavyweights like Toyota, Mitsubishi, Honda and Sony, while represented in Asia, also operate in most other global territories. The fund currency is Japanese yen, offering an alternative not only to rand-based investments, but also to major currencies.

“In our portfolios domiciled outside of South Africa we make use of currency hedging options against the yen. Japanese equities, much like the JSE, is a pro-cyclical market, so when the currency is weak, the market is strong and vice versa,” explains Lucas.

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According to Lucas, hardcore value investors are sure to have a field day with this ETF. “If North America stands out for high valuations, Japan stands out for low ones. A third of the Japanese stock market has a cash flow yield of over 15%. No other developed market comes close. Valuations are so low, that we view Japan as attractive for both aggressive and conservative investors alike.”

Valuations JapanIn addition to great value, Japanese companies are encouraged to increase dividend payouts from a low base, creating further earning opportunities for investors in this ETF. Adds Lucas, “Japan’s not just cheap, we like the buyers underpinning its markets. Members include the Bank of Japan, Japanese corporates, the Government Pension Investment Fund, and Japanese households.

“The BoJ is committed to buying ¥6 trillion in ETFs annually. Corporate Japan is on course to buy back ¥6 trillion in stock this year. The GPIF, the biggest pension fund in the world, is leading the way by raising its equity weight to 25% of assets, which implies it will buy ¥5 trillion in stocks this year. And in the first six months of this year, Japanese households, via NISAs, bought ¥2 trillion, or ¥4 trillion annualised.”

Net cash balances in Japan