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October 3, 2023

Views from the Desk: A Rising Sun on the Investment Horizon

Given the potential economic slowdown in both Canada and the U.S., investors currently have a unique opportunity to diversify their equity exposure in international markets where compelling growth opportunities persist. Japan is the world’s third-largest economy, accounting for roughly 6% of global output (ranking behind only the U.S. and China, and more than double the size of Canada). The strength in Japanese equities is underpinned by a variety of factors. Let’s take a look at four of the primary factors.

1. Strong gross domestic product (GDP)

Japan’s second-quarter GDP print of 6.0% was its strongest economic growth since 2015 (excluding the post-COVID-19 rebound), and marked its third consecutive quarter of accelerating growth, handily outpacing North American economies, which experienced mixed results over the same period.

2. Comparatively low interest rates

A global spike in inflation has led central banks around the world to raise interest rates to levels not seen in decades. Japan, however, hasn’t had the same inflationary experience as other developed economies and, as a result, has been able to keep rates relatively low and more accommodative. Japan’s policy rate remains at nearly zero, while the U.S., Canada and England have raised rates to 5.5%, 5.0% and 5.3%, respectively. These lower interest rates in Japan create a more conducive economic backdrop relative to other regions. 

3. Historically weak currency: the yen

The knock-on effect of the constrained interest rate environment in Japan has been a significant weakening of the yen relative to countries where rates are much higher. This has benefitted Japanese manufacturers by making their exports cheaper relative to other importing economies, further buoying domestic growth in Japan.

Graph of USDJPT performance from 2018-2023

Source:  Bloomberg Finance LP.  8/29/23

4. Rising exports

With the rapid depreciation of the yen, exports from this island nation have risen in 2023, leading to a bright spot of stronger economic activity in a tepid global investment universe.

Graph of Japan monthly exports from 2013-2023

Source:  Bloomberg Finance L.P.  8/29/23

A great way to participate: CI WisdomTree Japan Equity Index ETF (Ticker: JAPN/JAPN.B)

The confluence of the aforementioned economic drivers has led to particularly strong equity performance in Japan over the last year, both on a relative and absolute basis, as the Nikkei 225 Index has outperformed the S&P 500 Index over the past 12-month period (see chart below).

Japan’s stock market (as represented by the Nikkei 225) has also made successive highs for the last decade. Most impressively, in July 2023 it finally eclipsed the highs of 1990, which had stood for 30+ years. There appears to be no further technical resistance standing in the Nikkei’s way of targeting new all-time highs (vs. December 1989) in the near future.

A convenient way to access investment opportunities in Japan is CI WisdomTree Japan Equity Index ETF (JAPN, JAPN.B). This ETF is designed to provide broad exposure to Japanese equity markets. The Index consists of dividend-paying companies that derive less than 80% of their revenue from sources in Japan. By excluding companies that derive 80% or more of their revenue from Japan, the Index is tilted towards companies with a more significant global revenue base. As we discussed, such companies stand to benefit from the declining relative value of the yen.

Performance: Fund consistently outperforms the broad Japanese market

NKY Index26.53%18.76%14.33%9.55%9.51%

Source: Morningstar Direct as at August 31, 2023.
*Inception date: 2018-08-01

From a portfolio perspective, CI WisdomTree Japan Equity Index also has strong fundamentals compared to other broad-based indexes when considering dividend yield and various valuation metrics, such as Price/Earnings, Price/Cash Flow and Price/Book.

NameDividend YieldPrice/EarningsPrice/Cash FlowPrice/Book
S&P 500 Index1.6%22.415.74.2
Nikkei 225 Index1.9%17.914.11.9
CI WisdomTree Japan Equity Index2.8%

Source: Bloomberg Finance L.P as at August 29, 2023

Japanese equities also have a relatively low correlation to U.S. and Canadian markets, with the Nikkei showing a correlation of 0.2 and 0.267 to the S&P 500 and S&P/TSX Composite Index, respectively (source: Bloomberg Finance L.P, as at August 29, 2023). This makes an allocation to Japanese equities a useful addition for diversification purposes, if required, to help maintain a portfolio’s weighting in equities during difficult times in North America.


Glossary of Terms

Correlation: A statistical measure of how two securities move in relation to one another. Positive correlation indicates similar movements, up or down, while negative correlation indicates opposite movements (when one rises, the other falls).

About the Author

Lijon Geeverghese

Lijon Geeverghese, CFA

VP, Portfolio Manager – Capital Markets
CI Global Asset Management

Lijon Geeverghese joined CI First Asset in 2014 and is responsible for the index-based strategies of CI First Asset's exchange-traded funds (ETFs). Lijon has over 10 years of ETF experience, including portfolio management, ETF trading and market making. Prior to joining CI First Asset, Lijon was responsible for ETF market making at a large Canadian bank dealer. Lijon is a key point of contact between CI First Asset and the market-making community, providing trade solutions for investment advisors and facilitating effective client ETF transactions. He holds a Masters of Business Administration from the Smith School of Business at Queen's University and holds the Chartered Financial Analyst (CFA) designation.


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