US Listed Japan ETF’s Not as Cheap as You Think
Investing in Japan has been on my mind the past week, but so has the crowd. What this means is that American investors have not been fleeing.
A quick way to judge this is to simply compare the drop of the Tokyo Stock Exchange (TSE) Index compared to the ETF’s that trade on the US exchange.
The first three days following the disaster, the TSE fell 22%. Compare this to the iShares MSCI Japan Index (EWJ) which fell around 12%. Small cap Japanese ETF’s JSC, SCJ and DFJ fell roughly 14% a piece.
This is a big disparity and shows that the crowd is very willing to pick up shares in Japan.
Despite the 14% fall, the current prices really only go back to Dec 2010 levels which is not cheap to begin with. Add the currency risk into current prices, and Japan is not the bargain you think.
Are Japanese Stocks Cheap for US Investors?
As a quick example, assume that Panasonic (PC), at the 52 week high price of $16, is fairly valued. The point of this exercise will be to see whether current prices reflect value for US investors. I am not able to purchase stocks off the TSE and my assumption is that most people cannot as well.
Geoff Gannon made a great point about currency risk and how the overvalued Yen affects an investment.
Currently, 1 USD will get you 80 Yen but by looking at the conversion rate over the past 2 years, it looks like the appropriate rate should be 1 USD for 95 Yen.
Geoff took the normal rate to be 1 USD : 109 Yen, so my value is even more conservative.
Using the 95 Yen value, the Yen at the moment is 19% overvalued. In other words, Japanese stocks could lose 15% of its value simply based on currency conversion alone.
Apply this 15% drop to Panasonic and the theoretical fair value comes out to $13.60. At the current price of $12, the potential upside for Panasonic is 13%. Not the best opportunity you may have been thinking about.
If you include a 25% margin of safety, since EVERY investment requires a margin of safety, then the buy price is $10 which Panasonic does not satisfy.
Japan has Historically been Cheap
You could argue that the original fair value of $16 for Panasonic is much to low to begin with. If I perform the above calculation in reverse, the fair value of Panasonic would have to be $20 for the current price to offer value.
The problem however, is that Japan has always been cheap. If you believe that Japan is cheap now, then you should have believed that Japan was cheap before the earthquake.
If you did not have any positions in Japan before the disaster, it just means that you had better places to put your money. Put another way, it wasn’t that cheap.
Consider that when deciding whether your next Japanese stock is a value trap or opportunity of a lifetime.
Don’t let me discourage you though. I am looking through a list of Japanese ADR stocks hoping to find a no brainer.
Since I can not purchase stocks on the TSE, my best bet is to find an ADR. The universe is much smaller, but there are still plenty of ideas and you have a much better chance of finding a diamond with individual stocks rather than the Japanese ETF’s or closed end funds such as JOF.
Japanese ADR’s to Study
This site provides an outdated list of Japanese ADR’s and I have removed the stocks that no longer trade in the US.
Download the Japanese ADR stocks for excel. It has over 70 stocks you can look through. Most of them have zero volume on the OTC but it will be a good exercise to go through them.
For more Japan investing thoughts, here are some additional links that may interest you.