Japanese stocks have long been hailed as cheaper than their US counterparts, and while that hasn’t been enough to lure many US investors to stocks in Asia’s second largest economy, the worm could turn in favor of Japanese stocks. .
In fact, it can be argued that the stars are aligning for the WisdomTree Hedged Japanese Equity Fund (DXJ ). As the US dollar flirts with 20-year highs against the Japanese yen, the benefits of DXJ’s currency hedging are evident. Traded index fund easily outperforms S&P 500 and unhedged MSCI Japan index this year.
“Measured in local currency, Japan was the best performing country MSCI regional market in March, up 4.9%. In dollars, Japan lost 50 basis points due to currency weakness,” writes Jeremy Schwartz, Global Chief Investment Officer of WisdomTree. “It goes to a point that we often emphasize: currency changes don’t need to impact your foreign return, and you can target that local market return by hedging your currency risk.”
Dollar strength and yen weakness could easily persist through 2022 as the Federal Reserve has no choice but to raise interest rates to dampen inflation. Conversely, the Bank of Japan (BOJ) has no choice but to keep rates low to potentially fuel inflation.
Then there are the dividends. DXJ yields of 2.06% – well above the S&P 500 and almost 90 basis points above the MSCI Japan index.
“Since the pandemic, Japanese dividends have risen more than major regions, from the United States to Europe and emerging markets. While European dividends have contracted by more than 10%, Japanese dividends have increased by nearly of 18%, measured in local currency,” adds Schwartz. “Given the conservative payout ratios of Japanese companies – which helped cushion dividend cuts in 2020 – Japan tends to have a lower dividend yield than Europe, where dividend payments can be more cyclical.
Dividends are a relatively new phenomenon in Japan, but the potential for payout growth there is compelling because Japanese companies are prodigious cash generators, meaning they have the resources to sustain shareholder rewards over the long term. .
Fortunately, investors can access the benefits of DXJ’s currency hedging and dividend growth potential without having to embrace rich valuations.
“US equity earnings multiples are currently valued at a 20% premium to the historical median, reflecting an economy that is enjoying a robust recovery,” Schwartz concludes. “Japan, meanwhile, is priced at a 14% discount to its historical median.”
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