DFJ: Japan Is Different This Time, Consider Buying Small Caps On Dips

seekingalpha03-19

The WisdomTree Japan SmallCap Dividend Fund ETF provides exposure to Japanese small-cap companies that pay regular dividends.DFJ has consistently distributed dividends around 2.5% over the last five ...

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mizza464
03-25
mizza464
A good news

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Eoneren DFJ overview The WisdomTree Japan SmallCap Dividend Fund ETF (NYSEARCA:DFJ) is an efficient way for investors to get exposure to listed Japanese small-cap companies that pay regular dividends. They tend to be companies more linked to local economic growth in Japan compared to some of the larger export orientated listed companies. Those wishing to learn more about the index this ETF tracks, can visit the DFJ website here. Over the last five years, small caps have underperformed their larger counterparts. I shall explore further down why this represents an opportunity via DFJ. This ETF has a long history dating back to 2006. Over the last five years, the dividend distribution has consistently been around 2.5%. Whilst this is modest, it is quite sustainable as it is funded out of the underlying income of the stocks in the portfolio. With Japan’s highly publicized corporate governance reforms, this also points to optimism for the yield to offer room for improvement. As we can see from below, the fund size and expense ratios are reasonable given this style of ETF.   DFJ Factsheet December 31, 2023. DFJ fund past performance Below is the performance of DFJ according to the latest factsheet provided up until December 31, 2023.   DFJ Factsheet December 31, 2023. The Nikkei has got off to a huge start in 2024, with plenty of publicity about it hitting 40,000 points. As I write it has risen circa 19% YTD, and smaller Japanese companies have also risen, albeit to less of an extent. DFJ has also therefore built on its positive returns displayed above thus far in 2024. Over the long term, the performance table highlights an important fact. The WisdomTree Japan SmallCap Dividends Index that this ETF tracks, has built up some significant outperformance over the MSCI Japan Small Cap Index. DFJ peers’ analysis Another way to look at the benefit of using a dividend factor tilt with Japan’s small companies is to examine DFJ versus some peers. Let’s look at DFJ relative to the iShares MSCI Japan Small-Cap ETF (SCJ) and Japan Smaller Capitalization Fund (JOF). Note that the latter is a closed-end fund so the total returns analysis shall include some movement in the discount to NAV. For JOF over the last five years, though, the discount has widened by approximately a few percent. I would therefore not consider this a major factor in this returns analysis.   DFJ Peers comparison, Seeking Alpha.  Total Return 5 years to March 15, 2024, Seeking Alpha. DFJ distribution history As I mentioned in the DFJ overview in the beginning, the distributions here are not large. They are, however, consistent and sustainable, as demonstrated below.   DFJ Factsheet December 31, 2023. Long Japan stocks trade getting a little crowded on a short-term view I suggested in my title that DFJ is more an opportunity to buy on dips because thus far in 2024 Japan stocks have suddenly gained a lot of media attention. Whilst I am not a big advocate for market timing, my point is I would be reluctant to bet on Japan stocks in a major way at this point of widespread enthusiasm. The long-term fundamentals remain solid though as valuations are not stretched despite large gains in 2023 and YTD. The risks of disappointment in the shorter term are mounting, though, given the excellent gains witnessed in the last 12 months. Rather than due to valuations being a major obstacle, I see the risks of a correction more because of other factors. These include primarily the risk of the global economy weakening significantly. In this scenario, the risks of earnings forecasts getting revised down remain elevated. It could also finally see a strengthening yen, which may surprise global investors that have recently become so enthusiastic about Japan stocks. Signs of the long Japan stocks trade becoming a bit crowded have been evidenced this year. Some examples are illustrated below by the following couple of charts.   BofA Asia Fund Manager February Survey via Business News India: Latest Business News Today, Share Market, Economy   Variant perception February 2024 asset allocation discussion Also, taking a bigger picture view of global risk appetite, “risk-on” trades also seems crowded in the short term.   AAII International investors favoring Japan is still a relatively new story Taking a longer-term view, however, the popularity of the long Japan stocks trade looks to be only part of the way into a longer structural story. International investors have gradually been allocating to Japanese equities in the last few years. This, however, only partially reverses the opposite trend witnessed from 2016 to 2019.   Bloomberg via jpmorgan.com Valuations wise, the large gains in the Japan stock market in 2023 do not necessarily result in signs of overvaluation. Heading into this year, one could make a case there was plenty of room to run still. Price to book ratios remain low, especially considering companies in Japan are relatively cashed up.   Eastspring Investments I therefore view shorter term corrections in Japan’s stock market of circa 10% as an attractive buying opportunity. That being said, I see the more attractive opportunity in the small cap part of the market. Why is Japan’s stock market rising? The Tokyo Stock Exchange's \"naming and shaming\" type approach, along with increasing shareholder activism, is having a clear impact on companies increasing their dividends.   FactSet Research Systems, Bloomberg, Jefferies  FT In what increasingly looks like a longer-term structural trend, an ETF with a dividend factor tilt like DFJ stands to benefit further. A further boost in sentiment to Japan’s smaller dividend paying companies may come this year from the country’s changes in NISA policies. This makes it relatively more attractive for individual investors in Japan to invest in stocks. Historically, the Japanese stand out globally for investing large allocations of their savings towards cash and bonds. Along with the bias of targeting dividend-paying companies, there are also good arguments for focusing on small caps in Japan. The case for Japanese small cap stocks Large Japanese stocks have outperformed over the last 5 years, in part based on the trends I just discussed above. To illustrate this, below I have compared the returns of DFJ to the iShares MSCI Japan ETF (EWJ).   Five year total returns DFJ v EWJ, Seeking Alpha There are reasons however to expect this positive sentiment in the Japan stock market will spread more to small caps in the years ahead. Unlike some other countries, companies in Japan tend to respond well if they are indirectly “named and shamed”. This can become self-fulfilling, as the companies that are not lifting their corporate governance standards in relation to matters such as dividends will attract more attention. With such a backdrop, given the dispersion in recent returns between Japan’s large and small companies, the greater potential may lie in small caps. Valuations support this argument also. With Japan companies that trade under a book value of one increasingly under the spotlight, this area looks more promising for small caps.   Bloomberg Finance L.P. Data as of January 2024. To Yen or not to Yen, how to invest in Japan stocks? Many investors who forecast currency movements end up getting it wrong, so I am reluctant to express strong opinions here. It is a common question though for investors outside of Japan, and become quite topical in recent times due to the ongoing weakness in the yen. I would keep it simple and stick to unhedged Japan ETFs. This is despite the fact they have lagged considerably in the last year. In 2023, a Japan hedged equity ETF beat the unhedged MSCI Japan Index by about 2 to 1. The possibility of the Fed cutting rates soon may finally lead to some long-awaited strength in the yen. DFJ market capitalization and portfolio characteristics   Wisdom Tree DFJ website at March 17, 2024. DFJ sector allocations   Wisdom Tree DFJ website at March 17, 2024. DFJ top holdings   Wisdom Tree DFJ website at March 17, 2024. DFJ risks As I have emphasized above, Japan stocks have attracted a lot of interest in 2024 and performed fantastically well for the last 12 months. I would therefore be mindful of not overcommitting to an overweight position in Japan stocks right at this time. Some negative news out of left field in the short term leaves the market more vulnerable to a sharp decline from profit taking. Longer-term, the bigger risks lie if we see some broad-based global stock market weakness on the back of a slowing global economy. Recently, we learnt Japan narrowly avoided recession, so being an export oriented economy, there are still some risks here. Is Japan different this time? It might be worth pondering whether the structural fundamentals are improving such that Japan is less vulnerable to the global macro risks now. On the bright side, one may point to Japan committing substantial capex to semiconductors. JPMorgan is of the opinion that this, together with various other factors, may indeed make Japan different this time. Below highlights the announced subsidies for semiconductor projects in Japan.   Bloomberg Finance L.P., Ministry of Economy, Trade and Industry. Data as of February 2024. Conclusion DFJ is an attractive way to gain exposure to Japan small caps that pay dividends. This area has longer-term tailwinds still to play out from continued improvements in corporate governance along with attractive valuations. With Japan's stock indexes up about 40% in the last year though, and heightened risks of the global economy slowing, I view DFJ as a hold for the time being.  Should we see a correction over the next few months, however, DFJ is an attractive way to buy any dips in Japanese stocks. There are good reasons to suggest small dividend paying companies, on an unhedged currency basis, will be the better performing area of Japan stock market ETFs in the years ahead.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":288161049174192,"gmtCreate":1711374408322,"gmtModify":1711374411785,"author":{"id":"4121267905858872","authorId":"4121267905858872","name":"mizza464","avatar":"https://community-static.tradeup.com/news/fd324d9eb8aa2d6e0370fe1b2b9bf6d7","vip":1,"crmLevel":1,"crmLevelSwitch":1,"idStr":"4121267905858872","authorIdStr":"4121267905858872"},"htmlText":"A good news","listText":"A good news","text":"A good news","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/288161049174192","repostId":2420259362,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":0,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2420259362"}