The major North American indexes pulled back last week after the release of disappointing U.S. inflation numbers and concerns that the long-anticipated interest rate cuts might be farther in the future than people hoped.
Despite the setback, Canadian and U.S. stocks are still comfortably in the black this year. As of the close of trading on April 12, the S&P/TSX Composite had gained 4.49 per cent year-to-date, while the S&P 500 was up 7.41 per cent. The Dow was just above break-even at 0.79 per cent.
Those results aren’t bad given the inflation/interest rate environment, but some overseas markets are doing better – in fact, much better. Perhaps most surprising is the performance of Japan’s Nikkei 225 Index, which has gained more than 18 per cent so far in 2024.
Japan has been seen as a fading economic force by many investors in recent years. It’s aging population and low immigration levels are putting pressure on the work force, and a recent OECD analysis said that “global economic, monetary, and financial sector developments have increased risk and uncertainty.”
It wasn’t always this way. There was a time in the 1980s when it looked like Japan would dominate the global economy for generations. Cash-rich Japanese companies were buying up everything in sight, including many high-profile U.S. companies. Sony, for one, spent US$2-billion in 1988 to buy CBS Records and followed that up the following year by acquiring Columbia Pictures for US$3.4-billion in a move that shook Hollywood.
Meantime, Japanese real estate values soared. At one point in the late ‘80s it was estimated that the value of the 3.4 square kilometres occupied by the Imperial Palace in Tokyo was worth more than the entire state of California!
The Japanese stock market looked like it was going to the moon. On Dec. 29, 1989, the Nikkei hit an intraday record of 38,957.44, having increased by six times over the decade. No one at the time suspected it would not see that level again until Feb. 22 of this year – more than 34 years later.
During its decades-long slump, the Nikkei fell all the way to 6,994.90 in October, 2008. That was 82 per cent below its peak. The huge boom of the 1980s turned into one of the classic bubbles of all time.
Given this history, it’s not surprising that many retail investors have ignored Japanese stocks in recent years. But some fund managers have recognized the bargains that have emerged and have been quietly padding their portfolios.
There are several mutual funds and exchange-traded funds that specialize in Japanese securities. One of the top performers is an ETF most people are unfamiliar with: the CI WisdomTree Japan Equity Index ETF (Hedged) (JAPN-T). As of the end of March, the fund was showing a first quarter gain of 23 per cent and a one-year advance of 57.8 per cent.
The fund was launched in August, 2018. Its mandate is to track the price and yield performance of the WisdomTree Japan Equity Index CAD, before fees and expenses. The index consists of dividend-paying companies incorporated in Japan and traded on the Tokyo Stock Exchange that derive less than 80 per cent of their revenue from sources in Japan. That means it’s skewed toward companies with a significant global revenue base.
The top holdings include several global brands such as Toyota, Honda, Hitachi, and Mitsubishi, but also companies that aren’t as well known, including Japan Tobacco, Shin-Etsu Chemical, and Denso Corp. Consumer goods are the top sector in the portfolio at almost 28 per cent of assets. Financial services account for about 16 per cent, with industrial goods at 14.4 per cent. Technology is a minor player, at 7.45 per cent.
Distributions are paid quarterly, with the most recent being 29 cents per unit. The management expense ratio is 0.53 per cent. Note that this is a small fund, with only $25-million in assets under management. The iShares Japan Fundamental Index ETF (CDN-Hedged) (CJP-NE) is much larger, with assets of $116-million, but has not performed as well over the past three years and has a higher MER at 0.72 per cent.
I like JAPN but it has already had a strong run and the OECD warned in January that the postpandemic recovery in Japan has recently lost momentum. That said, I still think there is upside here. The units closed Friday at $48.61.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape