Forget China—Invest in Japan

01/19/2016 10:10 am EST

Focus: GLOBAL

Matt McCall

Founder and President, Penn Financial Group

All signs point to more moves by the Bank of Japan (BOJ) in 2016 that will lead to a lower yen, which will be a positive for large Japanese stocks, so Matt McCall, of Penn Financial Group, highlights the largest Japanese ETF and several individual stock names as a way for investors to play the Japan theme.

The fear of a great China slowdown has spread throughout Asia and the rest of the globe during the first two weeks of 2016. The Shanghai Composite has moved into bear market territory as investors question the ability of the Chinese economy in the coming years.

The Japanese stock market as measured by the Nikkei Index is not yet into bear market territory, but is down 14% since the beginning of December. One of the few bright spots for the current situation is that the index is sitting just above an important support level. In late September, the Nikkei hit a multi-month low of 16,901 before rallying with stocks around the globe. The low on the index in the most recent pullback is 16,944, thus forming what could turn out to be an extremely bullish double bottom pattern.

On top of the promising technicals, the Japanese stock market is attractive from a valuation viewpoint. Japanese stocks trade with a price-to-book ratio of 1.23, which is 55% below that of its US counterparts. Another way to look at the valuation is through the P/E ratio that is 24% below the 10-year historical average for Japanese stocks.

Then there is the Bank of Japan (BOJ), which is determined to fight off deflation and help boost exports through a program of weakening the Japanese yen. The yen had been in a downtrend since the beginning of 2012 until a recent rally due to the weakening of the Chinese yuan and the US dollar stabilizing. All signs point to more moves by the BOJ in 2016 that will lead to a lower yen that will be a positive for large Japanese stocks that export a large portion of their products.

There are a few ways for investors to play the Japan theme via individual stocks or ETFs. The latter is typically the best approach for the average investor.

The iShares MSCI Japan ETF (EWJ) is the largest Japanese ETF with $18.5 billion in assets. The ETF has a similar pattern to the Nikkei and is attempting to hold support at the $11.4 area after closing last Friday at $11.18. A bounce for the ETF is highly likely in the coming days/week. The largest holdings are a “who’s who” of Japanese companies. Toyota Motor Corp (TM), Mitsubishi UFJ Financial Group (MTU), and Honda Motor Company (HMC) are the top three holdings. The expense ratio is an acceptable 0.47% and the stock pays a small dividend of 1.33%.

The Japan theme is one that could play out in the short-term based on the charts, but it is also a longer-term investment opportunity for investors looking to diversify their portfolio outside of the US.

Matt McCall, Founder and President, Penn Financial Group

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