EWJV - EWJV: Attractive ETF Thanks To Improving Japanese Economy

2023-09-20 21:20:26 ET

Summary

• iShares MSCI Japan Value ETF is expected to benefit from Japan's improving economy and the flow of investment capital from China to Japan.
• EWJV has had an impressive performance in 2023, delivering a total return of 42.5% since late October 2022.
• The valuation of Japanese stocks, including those in EWJV's portfolio, is still attractive based on the revised Buffett Indicator.

Investment Thesis

iShares MSCI Japan Value ETF (EWJV) invests in about 150 large-cap Japanese value stocks. The fund should continue to benefit from Japan’s improving economy. As China’s economy continues to fall, and tensions between the U.S. and China continues, many foreign investment funds are withdrawing capitals out of China and invest in Japanese stocks instead. These should act as positive catalysts to EWJV. In addition, according to the revised Buffett Indicator, Japanese stocks are still relatively cheap compared to many other countries. Therefore, we think it is a good opportunity to own EWJV now.

Fund Analysis

EWJV is having an impressive 2023 so far

Like most other equity funds, EWJV has experienced dramatic decline in most of 2022. However, this trend was quickly reversed in late 2022. The fund has delivered an impressive 42.5% total return since reaching the low in late October 2022. In contrast, developed world market funds such as Vanguard FTSE Developed Markets ETF ( VEA ) only delivered a total return of about 28.6% in the same period.

Japan’s PMI continues to improve

Since EWJV invests in Japanese value stocks, it is important to take a look at Japan's economy. Here, we will take a look at Japan’s composite PMI data, a forward-looking indicator. As can be seen from the chart below, its composite PMI is now passed the level before the pandemic. This forward indicator suggests that the worst is now well behind, and Japan's economy will likely continue to thrive for the next little while, at least through the first half of 2024.

Money will likely continue to flow from China to Japan

According to Bloomberg which cited data for the first half of 2023, foreign buying of Japanese equities has exceeded that of Chinese peers for the first time since 2017. The reason behind this is that many fund managers are selling Chinese stocks and turn to Japanese stocks. There are two main reasons. First, geopolitical tensions and Chinese government’s unpredictable economic policies have caused many fund managers to be extra cautious in investing in equities in China. Second, China’s economy appears to face some structural issues such as extremely high household debts. In fact, the country’s August composite PMI is still below pre-pandemic level. A thriving Japanese economy and a struggling Chinese economy means that capitals will continue to flow out of China and pour into Japanese market. Therefore, we think this is a positive catalyst for investors of EWJV.

Valuation appears to be attractive

Despite a strong performance in 2023, we believe EWJV is still a good investment choice. Here, we will use Warren Buffett’s indicator to show why we think Japanese market is still attractive.

According to Warren Buffett, we can evaluate whether the broader stock market is overvalued or not by looking at the total market capitalization to GDP ratio. Due to central banks expanding their balance sheets significantly over the past decade, we think this ratio should be revised to total market capitalization to (GDP + assets) ratio to better reflect the reality. According to Buffett, if this ratio is below 75%, the market valuation is cheap. If it is within the range of 75% to 90%, the market’s valuation is fair. If this ratio is above 90%, the market’s valuation is way overvalued.

Below is a table that shows this revised Warren Buffett indicator in 10 major developed markets. As can be seen from the table, Japan’s total market capitalization to (GDP + total asset) ratio is 65.06%. This ratio is below the fairly valued range of 75%~90%. Therefore, Japanese stocks are still not expensive even after the impressive performance in 2023. When compared with other developed markets, its stock market is only higher than Germany’s 33.2% and Italy’s 21.98%. United States, Canada, and Switzerland have ratios above 100%. This suggests that Japan’s stock market appears to be cheap. Therefore, EWJV's portfolio of about 150 large-cap stocks appears to be attractive.

Source: GuruFocus

Investor Takeaway

EWJV’s valuation appears to be attractive based on the revised Buffett Indicator. In addition, EWJV should benefit from a prospering Japanese economy, and the investment capitals flowing out of China to Japan. Therefore, we think EWJV is a good investment vehicle for investors seeking exposure outside of the United States.

Additional Disclosure : This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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