Waiting For A Japan Comeback

Ulli Uncategorized Contact

The Japanese economy has been stuck in a deflationary scenario for the past 2 decades, while the stock market has been in a bear market for the same period.

Sure, there have been rebound rallies, but eventually they have all succumbed to even lower prices. It has been a buy and holders nightmare, but a good trading environment.

The NYT has some thoughts on the Japanese market in “Awaiting a Definitive Comeback in Japan:”

THE Japanese stock market has had more comebacks than Elvis.

In the last two decades, investment professionals have repeatedly proclaimed that Japan’s long bear market might have ended. Yet today, the country’s Nikkei 225 stock index languishes at about a quarter of its 1989 peak.

Given that performance, the record of Japan stock mutual funds shouldn’t surprise: They’ve returned a negative 6.8 percent, annualized, over the last decade, ranking last among foreign fund categories tracked by Morningstar.

Many investors have responded by leaving: money sluiced out of Japan mutual and exchange-traded funds from 2007 through 2009, according to the Financial Research Corporation. The sector had net outflows, on average, of more than 20 percent a year in that time.

“The last two years, it has been really bad — as if Japan doesn’t exist anymore,” said Taizo Ishida, manager of the Matthews Japan fund. “Right now, nobody is interested.”

Even so, Mr. Ishida remains optimistic about the prospects for Japan and thus for his fund. Given current Japan-stock valuations compared with, say, those in China, “Japan is a cheap way to get into Asia,” he said.

And Japanese stocks have had success of late. The MSCI Barra Japan index was up 7.3 percent for the first quarter and almost 35.6 percent for the 12 months ended March 31.

Ms. Benz also questions whether Japan funds, or any single-country offerings, really serve investors. “The vast majority of individual investors don’t need a country-specific fund,” she said. “The key advantage of a diversified fund is that your manager has an escape hatch if a particular market goes terribly wrong” — as, for example, Japan has over the last 20 years.

On top of that, single-country funds can tempt investors into mistakes. “Our research shows that the more narrow the investing universe, the less successful investors are,” said Fran Kinniry, principal in the Investments Strategy Group at Vanguard. More so than in diversified funds, people in single-country offerings may chase performance, buying as markets peak and riding the shares downward to losses, he said.

As I have noted in a previous post, the U.S. market has been on a tear since the February 10 correction with the domestic market outperforming many others. Take a look at a 6-months chart:

Here I plotted the S&P; 500 (SPY) against the emerging markets (VWO), Latin America (ILF) and Japan (EWJ). With the exception of the S&P; 500, the others have shown mediocre performance for the period.

My point is that you currently do not need to have exposure to every one of these markets, or single country funds for that matter. Look at the rankings, as shown in the weekly StatSheet, and select those funds/ETFs that show good upward momentum and are diversified.

Looking at the above graph, I am a bit perplexed by the fact that especially VWO and ILF are lagging the S&P; 500 for this period, since they have been leaders during the economic rebound of the past year. However, those funds with high performances will also be the leaders to the downside when the markets head back south.

Since we don’t know if this sudden non-correlation means that a market turnaround is at hand, we’ll focus on tracking our sell stops to be the guide in showing us when to exit, should market behavior dictate such a move.

Disclosure: We own positions in some of the funds mentioned above.

Contact Ulli

Leave a Reply