Co-Authored by Christopher Jabara, Research Analyst at WisdomTree
Since March 11, the headlines in Japan have not been very positive, but it appears that Japanese companies may once again be in focus as value opportunities for investors. Wilbur Ross, a billionaire U.S. value investor, has spoken about the value opportunities in Japan, while Warren Buffett went on a trip to Japan in November to scour for “cheap” companies with sustainable competitive advantages. Despite challenging demographics, a staggering debt burden, and exporter profits being hurt by the strong yen, we believe there are a number of reasons for investors to take a fresh look at potential opportunities in the third largest economy in the world (behind the U.S. and China).
Fair or not, the average Japanese equity as of November 30th, 2011 in the MSCI Japan Index was selling for prices below the liquidation value of the company without any regard for valuing assets on the balance sheets above their historical accounting values or any potential future earnings growth. Small cap Japan stocks are selling for even 20% lower prices. Moreover, there may be other positive features of Japan equities:
· Favorable dividend yields of Japanese equities compared to Japanese Government Bonds (JGBs)
· Japanese companies have reduced debt burdens and raised cash holdings
· Japanese companies are increasingly exporting to China and the emerging markets and offer indirect way to invest in that growth trend.
· Strong yen bodes well for restraining import prices and global acquisition activities
While the aforementioned bullets outline what WisdomTree believes are favorable characteristics of the Japanese equity market at this time, investments in Japanese equities are still subject to investment risks and investors could potentially lose money in the Japanese equity market.
Japan has been ignored by investors for much of the last 20 years due to one of the largest bubbles in the history of equity markets when the Nikkei peaked in 1989. It took time for Japan’s fundamentals to catch up with their market prices as prices continually compressed.
Many investors are looking at ways to access growth in Asia and the emerging markets. Japan’s exports to those nations make it a prime candidate for consideration, given the relatively low prices of Japan equities.
In the WisdomTree research report titled: “Is it Time to Look Closer at Japanese Equities?” (.pdf), we present some more detailed data on the reasons we mentioned above for why now may be a good time to consider investing in Japanese stocks.
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing their investments on smaller companies or certain sectors increase their vulnerability to any single economic or regulatory development. The Funds focus their investments in Japan, thereby increasing the impact of events and developments in Japan that can adversely affect performance. This may result in greater share price volatility. Investments in currency involve additional special risks, such as credit risk, interest rate fluctuations, derivative investments which can be volatile and may be less liquid than other securities, and more sensitive to the effect of varied economic conditions. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, call 866.909.WISE (9473) or visit wisdomtree.com.
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WisdomTree Funds are distributed by ALPS Distributors, Inc.
Jeremy Schwartz and Christopher Jabara are registered representatives of ALPS Distributors, Inc.
 Source: Bloomberg. The MSCI Japan Index is a subset of the MSCI EAFE Index and measures the performance of the Japanese equity market. The MSCI Japan Index was selected for comparison because it is one of the most commonly used benchmark indexes for measuring performance of Japanese equities.
 Source: Bloomberg, based on the MSCI Japan Small Cap Index. The MSCI Japan Small Cap Index measures the performance of small cap stocks in the MSCI Japan Index.