I recommend WisdomTree Japan Hedged Equity index (DXJ), an exchange traded fund that invests in dividend paying Japanese companies while hedging the yen’s fluctuations against the dollar. If the Yen continues to weaken, this index should capture the full benefit of increased yen share prices on its export-dominated holdings. The 300+ name index excludes companies that derive 80% or more of their revenue from Japan, which tilts the index towards companies with a more significant global revenue base. Additionally, the top 10 holdings in the index derive almost 60% of their revenue from overseas.
The short Yen thesis is well documented so I won’t regurgitate it all here except hit a few highlights:
Spend five minutes looking at the historical financials and profile of a Panasonic (or Sharp, Hitachi, etc.). The constant build-up of debt over the years to support the consistent lack of free cash flow generation, end markets in decline, a green innovation strategy that is intended to right the ship, and a 300,000+ employee workforce who depend on that ship not going down. The severity of the situation in Japan is just as acute from a bottom’s up perspective in many areas as it is from a top down level.
The current account recently turned negative.
Implications of Abe election and likely new central bank chief.
Yen’s role as a release valve in a potential debt crisis.
For the contrarian who has a hard time jumping in after the big move the past few months – I would say extend your perspective. The trailing five-year annualized returns of Japan equities, as measured by the MSCI Japan Index in yen, through Dec. 31, 2012, was negative 9.0%. The MSCI Japan Index in U.S. dollars returned negative 4.3%.
The charts below show the strong correlation between the DXJ and Yen over any time period chosen:
Additional information on the index includes:
1. Mitsubishi UFJ Financial Group
2. Takeda Pharmaceutical Co
3. Canon Inc
4. Honda Motor Co Ltd
5. Mitsui & Co Ltd
6. Japan Tobacco Inc
7. Nissan Motor Co Ltd
8. Toyota Motor Corp
9. Astellas Pharma Inc
10. Itochu Corp
2. Consumer Discretionary
3. Information Technology
4. Health Care
6. Consumer Staples
Price/Cash Flow Ratio
Total Market Cap
Trades at slight premium to NAV
Consensus trade but so was a “doozy of a recession” in 2008 - it won’t matter in the end
I do not hold a position of employment, directorship, or consultancy with the issuer. I and/or others I advise hold a material investment in the issuer's securities.