EWJV - EWJV ETF: In Vogue But Overbought At This Point

2023-09-20 10:50:34 ET

Summary

• EWJV, which focuses on Japanese value stocks, is receiving plenty of attention because of the huge net cash position and relatively low valuations of Japanese stocks.
• Despite a sturdy performance this year, valuations still look cheap, and when the BOJ pivots away from its ultra-loose policy, value stocks should still have plenty of takers.
• The recent dynamics on the standalone weekly chart and the relative strength chart suggest that the price action looks overextended.

The Value Style Is On The Rise

The iShares MSCI Japan Value ETF ( EWJV ) is one of the more recent additions (listed only in March 2019) to the Japan ETF universe, of which you currently have around 20 options to choose from. It's worth noting that besides the Franklin options, none of the other ETFs have a cheaper expense ratio than EWJV (0.15%) thus raising this ETF's profile.

EWJV's niche is also rather useful as it focuses on 140 odd large and mid-cap Japanese stocks that exhibit "value" characteristics, and also have low "valuations". Essentially, stocks are screened and assigned value ratings based on three key metrics, namely- a) the 12-month forward earnings yield, b) current book value to price, and c) the current dividend yield.

It's fair to say that in recent periods, Japanese value stocks have been the talk of the town, particularly since the Tokyo Stock Exchange has been calling on these businesses to provide clarity on how they intend to improve their capital allocations. Stocks, where the prices are trading below book value, have received more scrutiny; incidentally, the Japanese universe is littered with stocks of this ilk, with close to 50% of the Topix 500 Index consisting of stocks priced below their book value.

The other important aspect to consider is the potential ammunition on offer to tilt this narrative. Quite unlike other developed markets such as the US or Europe where large-cap firms with a net cash position (where cash on books exceed the total debt) only account for 20% of the total universe, in Japan the situation is drastically different with well over 50% of the firms maintaining a net cash position. Given the impetus from the central exchange, expect a greater chunk of this excess cash to be used to buy back their stock or pay dividends. In fairness, the quantum of dividends paid has been hitting record highs for two years, and this trend looks set to persist through March 2024 at least. Nonetheless, investors don't have to fret about losing exposure to this wave, as EWJV's portfolio turnover ratio is below the median annual turnover rate of around 31% ; with EWJV, only 1 in 4 stocks typically get churned every year.

Another major catalyst for value stocks could be the Japanese government's intention to double the size of a tax-free Nippon Individual Savings Account (NISA) investment scheme that could potentially stimulate citizens to gravitate toward higher-yielding dividend plays in the markets. Besides, one also needs to consider that the central bank of Japan is unlikely to keep its ultra-loose monetary policy on tap for too long, given that inflation numbers have exceeded their target for over 12 months, and will likely come in at 2.6% by the end of this year. If and when rates start rising, this could be particularly inimical for sentiment towards growth stocks (a steeper discount rate to discount cash flows), and you'd think the added insurance that one would get with dividend-yielding value plays would appeal to investors a lot more.

Valuations And Risk Profile

Given all these developments, it's no surprise to discover that EWJV has outperformed the flagship iShares MSCI Japan ETF ( EWJ ) this year by close to 700bps. Interestingly enough, despite this bout of outperformance, the valuation narrative still looks favorable for the former. As per Morningstar data, the holdings of EWJV are currently still trading well below book value on a weighted average basis ( 0.87x ), whereas for EWJ the corresponding ratio is around 37% higher at 1.21x. So long as these holdings trade below book, you'd think EWJV will attract plenty of attention.

Besides the cheap valuation facet, it's also worth highlighting that from a risk angle, EWJV looks like a more reliable bet. If risk sentiment turns sour, you may want to stay exposed to less volatile products and EWJV has managed to exhibit an edge on this front with the standard deviation of its monthly returns (on an annualized basis), coming in around 200bps lower than the popular EWJ ETF.

It isn't just the lower volatility profile that's worth noting. You also want to get a sense of how these ETFs have fared when faced with ample downside deviation, and note that EWJV has managed to demonstrate solid Sortino readings of over 1x, even as EWJ has floundered at 0.33x.

Closing Thoughts - Technical Considerations

EWJV is currently in vogue and with good reason, but getting in now wouldn't necessarily represent the most optimal use of your resources given where the ETF is currently perched. Basically, EWJV is currently trading at lifetime highs, and the most recent uptrend, which kicked off in mid-August, looks increasingly steep, having also just broken past the upper boundary of an ascending channel that has been in play since October last year. Also, consider that the RSI (Relative strength index) indicator has now hit levels from which we've previously seen a pivot. All things considered, we believe the more sensible option would be to wait for a pullback in the price action before contemplating a long position.

Our purchasing enthusiasm is also further dampened by what we see on the relative strength charts, where Japanese value stocks as a function of all Japanese stocks look relatively overbought; this ratio as well is at record highs and trading well above the mid-point of its long-term range. This increases the probability of some mean reversion in the weeks ahead.

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