By Jeremy Schwartz, director of research at WisdomTree. WisdomTree offers the WisdomTree Japan Equity UCITS ETF USD-Hedged (LON: DXJ) which provides US dollar-hedged exposure to the Japanese equity market – with a tilt toward the exporters. DXJ has over $200 million in AUM, a TER of 0.48% and is also offered with currency hedging relative to the British pound, euro or Swiss franc.
Jeremy Schwartz, director of research at WisdomTree.
Once a year, WisdomTree conducts a rebalance of its dividend-weighted stock indices which adjusts positions based on changes in relative valuations. We measure these relative valuations by examining stock price movements versus fundamentals in international markets. The primary variable we are utilising in our broad-based index strategies is a company’s dividend stream.
At this year’s May rebalance, we noticed how Japan is leading the international markets in terms of underlying dividend growth. Looking across regional indices, whether looking at the trailing three-year or trailing five-year changes in dividends, Japan stands out from broad international indexes like MSCI EAFE or MSCI Europe. The five-year numbers come in at almost double digits—very close to the US markets, while for the latest three years, Japan actually came out with a dividend growth figure higher than the US. On a longer-term perspective, over the last 10 years—and that is a period that includes the financial crisis that caused dividend levels to sink across the globe—eurozone regional indices still show lower overall dividends in 2017 than they did in 2007, but the three-year dividend growth shows a meaningful pickup recently.
Regional dividend growth
Source: WisdomTree.
WisdomTree’s Japan Hedged Equity Index
This year’s rebalance in the Japan index family did not result in large portfolio allocation shifts. From a sector perspective, consumer staples and consumer discretionary were two sectors that saw increases in weight, and industrials and materials saw the biggest two reductions in weight. In a way, this makes the index modestly more defensive in nature due to historically lower betas of consumer staples companies, but this was only a modest change.
Sector comparison
Source: Wisdomtree.
Relative sector weights versus pre-rebalance
Source: WisdomTree.
From a valuation perspective, the WisdomTree Japan Hedged Equity Index was already among the lowest priced indices that WisdomTree calculates for developed world exposure—and the index rebalance did not change those statistics noticeably. The price-to-earnings (P/E) ratio before and after was right around 13x earnings, and the dividend yield was 2.5%. Interestingly, that is approximately 25% higher than the approximately 2% dividend yield on the S&P 500, and we saw dividend growth levels for Japan rivalling the increases in dividends we see in the US.
Given lower returns on equity (ROE) in Japan—but a renewed focus on improving these ROE metrics—and high cash on the balance sheets among corporate Japan, it is our expectation that Japanese equities still have room to increase dividends and buybacks at a pace that rivals or can beat the US.
Valuations Multiples
Source: WisdomTree.
The combination of attractive valuations—the lowest P/E ratios in the developed world regions and indexes that WisdomTree covers—along with dividend growth among the highest levels makes for a very positive dynamic and continues to suggest over-weight allocations to Japan.
(The views expressed here are those of the authors and do not necessarily reflect those of ETF Strategy.)