In yesterday’s issue, I encouraged you to begin flexing your contrarian muscles. But I’ve been doing this long enough to understand a simple truth: The practical trumps the theoretical.
While you might enjoy consuming educational info on occasion, what you’re really after is specific, actionable recommendations. Or as one loyal curmudgeon barked during my presentation at a financial conference, “Give me the picks already, Lou!” Fair enough.
With that in mind, I’m sharing new data on two contrarian ideas I previously put on your radar. My ultimate goal? To finally convince you to do something different from the majority before it’s too late.
Newsflash: I’m no longer the only bull in Japan. In his annual “Surprises” list, Blackstone Advisory Partners’ Vice Chairman, Byron Wien, predicts, “The Nikkei 225 continues the strong advance that began in November and trades above 12,000 as exports improve and investors return to the stocks of the world’s third-largest economy.”
The data suggests that the “return” he speaks of is already materializing, too. Fund flow tracker, EPFR Global, reports that Japan equity funds recorded their biggest yearly inflow last year since 2005. If you haven’t done so already, crank up The Vapors and start turning Japanese.
Based on Wien’s price target for the Nikkei – and the cheapness of Japanese stocks – we’re talking about a no-brainer, double-digit profit opportunity here. How do we play it?
Well, a weakening yen bodes well for sales for large-cap exporters, as the currency decline makes their products more affordable overseas. While that’s good news for the company, it’s not so good for U.S. investors. Losses from currency translation can eat into our profits from stock price gains.
The solution? The WisdomTree Japan Hedged Equity Fund (DXJ). As the name suggests, this ETF hedges its exposure to the yen, while investing in some of the largest dividend-paying Japanese stocks.
Now, if you’re a value investor, the biggest bargains in Japan reside in the small-cap space. And since these companies largely cater to the domestic market, currency fluctuations don’t matter nearly as much.
I’ve previously shared the WisdomTree Japan SmallCap Dividend Fund (DFJ) with you as a small-cap option. And it’s still a solid bet. But it’s about time I come clean on my favorite small-cap Japan play – the Japan Smaller Capitalization Fund (JOF).
It’s a closed-end fund, which means there’s an opportunity for us to scoop up shares for a discount to the Net Asset Value (NAV). And that opportunity is right now. The fund currently trades at a 10.13% discount to the NAV.
Even better, momentum is on our side. The fund is up 12% from the November lows and is still trending higher. Super cheap and in an uptrend? Get onboard before it’s too late!
Don’t Forget Europe, Too
Next to Japan, one of the most detested investment regions in the world has to be Europe. I originally sent out a contrarian alert on Europe about two weeks ago. But sentiments are changing quickly, which means it’s high time to act.
Case in point: Tim Stevenson, Director of Pan European Equities at Henderson Global Investors Ltd., recently said, “Global investors have been either reducing their underweight positions or even moving slightly overweight [into European equities].” In other words, they’re turning bullish on European stocks.
The latest fund flow data backs him up, too. For instance, in the last week, almost $70 million flowed into the SPDR EURO STOXX 50 ETF (FEZ), according to ETFChannel.com. What’s Stevenson’s read on the situation? The same as mine.
He expects “European equities to continue the improvement trend that began last July,” as “canny investors” take advantage of unjustifiably cheap stock valuations in Europe. Mind you, it’s getting easier to take advantage of the situation, too. BlackRock recently acquired Credit Suisse’s ETF business. And it’s ramping up ETF availability in Europe.
Joe Linhares, European head of iShares, BlackRock’s ETF unit, says, “Interest in ETFs in Europe by retail investors and wealth management firms is just coming alive.” He expects European-listed ETF assets to double over the next three years, to $700 billion. In the end, Europe represents another cheap momentum trade. And such trades don’t last forever. So don’t delay.
Bottom line: If you lacked the intestinal fortitude to follow my original recommendations on Japan and Europe, maybe the latest data will finally convince you to act. If not, you could miss out, as the window of contrarian opportunity keeps narrowing.