InvestSMART

Investing in global stocks? Take a closer look at Japan

Given that it's the world's third largest economy with the largest stock market in Asia, Japan's stock market is too big and too dynamic for you to ignore.

Having spent years in stagnation, it’s easy to see why global investors have for so long snubbed Japanese equities, which at 7% is the second-largest weighting on MSCI All-Country World Index (after the US). But despite being hit hard by COVID earlier this year, the Japanese stock exchange in Tokyo, the world’s fourth largest stock market, recently catapulted to its highest level since 1991 (25,044).

The recent rally in Japanese stocks follows renewed domestic investor interest in the country’s instantly recognisable global icons, previously overlooked in favour of the country’s emerging start-up stocks.

Japan is back on radar

Japanese companies are benefiting from the series of economic and structural reforms – aka Abenomics – embarked upon back on 2012. Without doubt, Japan is also benefitting from the economic development of its Asian neighbours, which is helping it to reduce its reliance on China as a manufacturing source.

Based on the strength of its encouraging recent performance, and dismally low returns on offer elsewhere, a lot more foreign investors are expected to follow domestic investors back into Japan’s most famous big corporations.

While known primarily for its electronics - including computers, digital cameras, plus robotics, aeronautics and automation - and automobile industries, Japan is also now world’s second-largest pharma and med-tech market.

Among foreign investors displaying renewed interest in Japan is high profile, US-based value investor, Warren Buffett whose investment company recently selected highly diversified conglomerates, including Itochu Corp (8001.T)Marubeni Corp (8002.T)Mitsubishi Corp (8058.T)Mitsui & Co (8031.T) and Sumitomo Corp (8053.T)

 

Gain exposure to Japan via an ETF

Within the Top 100 stocks on the Japanese Stock Exchange’s leading index, the Nikkei 225 – a price-weighted index that tracks the 225 largest stocks listed in Japan - are international household brands like Toyota, Sony, Nintendo, Shiseido, Olympus, Fujitsu, Bridgestone, Suzuki, Honda, Hitachi and Japanese Post to name just a few.

As an Australian investor, there is nothing to stop you buying these individual stocks direct via an overseas trading account. However, another way to tap into the diversification opportunities that Japan’s share market offers is via an international ETF. Buying an ETF allows you to capture exposure to stocks on the Nikkei 225, along with other global markets - within just one trade.

Give that the Nikkei 225 is what’s called a ‘price-weighted’ index, and not market-capitalisation-weighted – in which trading prices determine how much of the index they comprise - the index is not tracked by many ETFs or index funds. However, a cheaper and easier way to include Japan’s biggest stocks (on the Nikkei 225) within a much broader diversification of global stocks – comprising the US, European and Asian markets - is via InvestSMART’s International Equities Portfolio.

Almost half (42%) of the five-plus global ETFs that InvestSMART’s International Equities Portfolio holds are in the Vanguard MSCI Index (ASX:VGS). As a true reflection of the global index that it’s benchmarked against (the MSCI World ex-Australia Index), 8% of market allocation within VGS is in Japan, second only to the US (67.9% of total allocation).

During the September 2020 quarter, InvestSMART’s International Equities Portfolio outperformed peers by 0.63%, and since inception in 2014 has returned 9.8% p.a.

Find out more about investing in the InvestSMART International Portfolio by clicking through to our invest with us page.


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