Japan: The Best Performing Equity Market YTD

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Japanese stocks have had an incredible run so far this year. The benchmark Nikkei 225 index is up 32.7% as May 1st. Compared to this, only a few of the developed indices are up by double digit percentages. The year-to-date (YTD) performance of major developed indices as of May 1st are listed below:

  • DAX: 4.0%
  • FTSE 100: 9.4%
  • CAC-40:  5.9%
  • S&P 500: 11.0%
  • Dow Jones Industrial Average: 12.2%
  • IBEX 35: 3.1%
  • Swiss Market: 15.9%

Note: Except the U.S. and UK markets, the rest of the markets were closed on May 1st for Labor Day holiday.

I wrote an article about investing in Japanese stocks back in January. Since that time the Nikkei has surged to outperform the U.S. indices.

The chart below shows the 2-year performance of  Nikkei against the S&P 500 and Dow Jones indices:

Click to enlarge

Nikkei-vs-Dow-SP500-Indices

Source: Yahoo Finance

A significant portion of the gains in the Japanese equity markets can be attributed to foreign investors. After the asset bubble burst in the early 90s,  domestic investors avoid stocks have continued to avoid stocks and the country has one of the lowest stock market participation among developed countries.  Due to the steep rise of Japanese stock prices this year, investors may want to tread cautiously before initiating any new positions. In the past two decades Nikkei rallied many times only to lose all the gains.

The best way to gain exposure to Japan is via ETFs. The iShares MSCI Japan ETF (EWJ) is the country-specific ETF for Japan. It has an asset base of over $10.0 billion and  total holdings of 313 companies. The other two Japan-focused iShares ETFs are iShares Japan Large-Cap ETF (ITF) and iShares MSCI Japan Small-Cap ETF (SCJ).

Update:

From Mrs. Watanabe Strikes Out, The Wall Street Journal (May 3, 2013):

Japanese stocks have been on a tear; the Nikkei index rose about 50% between November and mid-April. That is thanks to the pledge by newly elected Prime Minister Shinzo Abe to reform the country’s economy and more importantly the central bank’s plan to stoke 2% inflation.

But it isn’t clear Japanese investors are confident the good times will last. While foreign investors bought a net $77 billion of stock during that period, Japanese individuals and institutions sold a net $74 billion, according to the Oriental Economist. (emphasis added)

Disclosure: No positions

Update: SABESP ADR Splits Again

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On January 26th of this year I wrote an article discussing the stock split of Brazilian water and sewage services utility Companhia de Saneamento Basico do Estado de Sao Paulo also known as SABESP (SBS). After an incredible run in 2012, the stock was split in the ratio of 2:1 on January 24th. After the split, SBS opened at $44.31 on that day and closed at $44.62.

Since the split in January, the stock has mostly remained stable and reached a high of $49.05 in March. However unlike the last time when the stock was split when the price hit over $90.00 , this time the stock was split into 3 for 1 on Apr 30, 2013 when the price was in the low 40s. After closing at $42.06 on April 29th, SBS opened at $14.03 the next day on a split-adjusted basis. Today it closed at $14.31.

The following chart shows the 2-year returns:

Click to enlarge

SBS-2-Yr-Returns

Source: Yahoo Finance

Currently SABESP has a market cap of $9.80 Billion and a dividend yield of 2.27%.

Disclosure: No Positions

Comparing Light Vehicle Density in Select Countries

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The automotive industry is one of the most important industries not only in developed countries but also in emerging countries.  From China to Brazil and most developing countries in between governments are encouraging the growth of this industry. The prevalence of autos is still small in most developing countries compared developed countries. Hence the potential for growth in emerging markets is much higher.

The table below shows vehicle density in select countries:

Click to enlarge

Vehicle-Density-by-Country

Source: Russian and CIS automotive industry overview, March 2013, Ernst and Young

A few interesting points to note from the above table:

  • BRICs have lower vehicle density than developed countries such as the U.S. and Germany.
  •  With 260 cars per 1,000 people Russia has the highest vehicle density among BRICs and India has the lowest rate.
  • Brazil ‘s vehicle density per 1,000 people is higher than India and China’s rates.
  • The U.S. has the largest vehicle fleet size and density among developed countries due to the lack public transportation in much of the country.
  • Though the U.S. population is roughly double that of Russia’s population, the total light vehicle fleet is about six times that of Russia’s.
  • Since the vehicle density is only in the double digits in India and China, automakers have a  huge market potential in these countries.

7 Behavioral Bias To Avoid In Investment Management

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The Financial Post has published an interesting article today on behavioral biases that investors should avoid. The author David Pett notes the following seven biases:

  1. Representativeness
  2. Familiarity 
  3. Overconfidence
  4. Anchoring 
  5. Attachment bias
  6. Gambler’s fallacy
  7. Herd mentality

Source: 7 stock picking behaviours you should avoid, Financial Post

An important bias noted in the article:

Familiarity is a dangerous inclination that can thwart the benefits of global diversification. Many investors concentrate too much on opportunities in their own country because it’s what they know and understand best.

“Investors generally feel more comfortable with their home market and allocate investments accordingly, even if it results in a poorer risk–return trade-off for their portfolio,” said analysts at The Vanguard Group Inc. in a 2012 report.

Home country bias is one of the main emotional biases that many investors can’t seem to ignore. A typical U.S. investor has most of the assets invested in U.S. assets including stocks and bonds despite the availability of better opportunities abroad. Even many Financial Advisors, who should be better in their profession than the investors that hire them, fall into this trap. The key point that investors should remember that in a globalized world, companies are not tied to one country anymore and they are not patriotic in any way. Hence investors should change their mindset accordingly and not get too attracted to home country companies. Investors looking for income for example, can get much higher yields in companies located just north of the border in Canada or in far away places like Australia, Chile, etc.

The whole article is worth a read.

Here is a cool chart I came across a while ago on the “Types of Herd Behavior”:

Click to enlarge

Types-of-Herd-Behavior

Source: Unknown

A Look at Foreign Defense Sector ADRs

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One of the sectors that seem to perform well regardless of the state of the economy is the defense sector.  For example, U.S. defense contractors have held up well despite budgets cuts. While many of the major U.S. defense companies trade on the organized exchanges none of the foreign firms are listed on them. Instead all these firms trade on the OTC markets as shown below with their current dividend yields:

S.No.CompanyTickerDividend Yield as of Apr 26, 2013Country
1BAE SystemsBAESY5.15%United Kingdom
2BBA AviationBBAVY3.84%United Kingdom
3Chemring GroupCMGMY3.85%United Kingdom
4CobhamCBHMY3.56%United Kingdom
5European Aeronautic Defence & Space-EADSEADSY1.08%Netherlands
6FinmeccanicaFINMYN/AItaly
7MeggittMEGGY3.37%United Kingdom
8MTU Aero EnginesMTUAY1.88%Germany
9Qinetiq GroupQNTQY1.65%United Kingdom
10Rolls-RoyceRYCEY2.24%United Kingdom
11SafranSAFRY1.77%France
12ThalesTHLEYN/AFrance
13Ultra ElectronicsUEHPYN/AUnited Kingdom
14VitecVTEPYN/AUnited Kingdom
15Zodiac AerospaceZODFY1.51%France

 

France-based Safran (SAFRY) is one of the best performing stocks with the stock up over 13.0% YTD. British aerospace and defense giant BAE Systems (BAESY) has had an performance since the merger proposal with EADS fell apart late last year.

Note: Dividend yields noted are as of April 26, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions

Disclosure: No Positions