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Here's a top-rated exposure to Japanese equities

Nicholas Grove  |  22 Nov 2016Text size  Decrease  Increase  |  

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Should Japanese equity markets receive a further boost from a rising US dollar against the yen and Trump-backed stimulus, local investors have an attractive option for exposure to this thematic.


Morningstar UK fund analyst Kenneth Lamont points out in a recent article that Japan has more to gain or lose from changes to US economic and foreign policy under a Trump presidency than most other countries.

"As its largest trading partner, the US accounts for around one-fifth of all Japanese exports. As such, the fortunes of the Japanese equity markets, which are packed with exporters like Sony and Toyota, will be closely linked to the decisions made within the incoming Trump administration," Lamont says.

"Despite the country being the subject of much accusatory finger pointing during Mr Trump's campaign speeches, there are reasons for Japanese equity investors to remain positive."

Lamont says expectations of rising rates in the US, which have already seen a strengthening of the US dollar against the yen, coupled with the expected large-scale fiscal stimulus in the US, could both lower the cost and increase demand for Japanese goods and services.

However, Lamont says Trump's protectionist rhetoric has left the fate of the Trans-Pacific Partnership Free Trade Agreement, which includes Japan, hanging in the balance.

On Monday, Trump released a YouTube message laying out actions he intends to take during his first 100 days in office, which includes withdrawing the US from the Trans-Pacific Partnership.

"The introduction of additional trade restrictions or tariffs would portend bad news for Japanese exporters," Lamont says.

But despite an initial sell-off, Japanese equity markets have responded positively since the electoral shock in the US in early November, he says.

Below is an investment option for those Australian investors wanting exposure to Japanese equities markets.

It has been assigned a Morningstar Analyst Rating, a forward-looking qualitative assessment of a fund's ability to offer superior returns relative to its peers--whether active or passive--over the long term.

iShares MSCI Japan

Carrying a Bronze Morningstar Analyst Rating is the iShares MSCI Japan ETF (ASX: IJP).

While it is an attractive choice for passive Japanese equities exposure, it is not cheap for an exchange-traded fund, according to Morningstar fund analyst Anshula Venkataraman.

"The MSCI Japan Index has proven to be a difficult benchmark for active managers to beat. There is room for improvement, though. IJP charges 0.48 per cent, which is far cheaper than active funds, but expensive for a passive equity ETF," she says.

Regardless, Venkataraman says IJP is well managed.

"IShares has run the MSCI Japan ETF in the US since 1996 before it was brought to Australia in 2007. IJP has decent scale too, at nearly $200 million in assets, and is cross-listed on the ASX from the primary New York listing, allowing local investors to tap its strong liquidity," she says.

"Holding this ETF gives investors exposure to Japan's largest companies, many of which are global brands such as Toyota, Sony and Canon, but there are also large domestically focused companies which are exposed to the Japanese economy."

Venkataraman says IJP could be a "good diversifier" for Australian investors, given the large exposures to sectors not prominent in the local market.

"While IJP is not a cheap ETF, there simply aren't many Japanese equity alternatives for Australian investors," she says.

"It's debatable whether investors need separate Japanese exposure given they can get this through global equity funds. But for those who want Japanese equities, iShares MSCI Japan is worthy."

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Nicholas Grove is a Morningstar journalist.

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