EWJV ETF: Better To Wait For A Pullback (NASDAQ:EWJV)

manassanant pamaiIntroduction The iShares MSCI Japan Value ETF (NASDAQ:EWJV) is a $2.6bn sized product that provides low-cost access (an expense ratio of only 0.15%) to 134 large and mid-cap Japanese stocks that exhibit value characteristics. EWJV’s tracking index – the MSCI Japan Value Index, seeks to pick out these value traits by putting, to good use, three key metrics. Two of those metrics are backward-looking- the dividend yield, and the book value to price ratios. Meanwhile, the forward 12-month P/E ratio serves as the sole forward-looking gauge. Over the past year, these metrics have done a good job in procuring cheaply valued Japanese stocks that have eventually ended up witnessing an impressive expansion in their market cap. For context, note that over the past year, EWJV has delivered healthy returns of almost 20%, and in the process, also comfortably outperformed its developed market peers by more than 2x. YChartsCrucially, despite the strong performance seen over the past year, EWJV’s valuations still continue to remain quite attractive. According to Morningstar, EWJV is currently priced at a P/E of only 12.76x, which is still cheaper than the Vanguard Developed Market ETF (VEA) is priced at 13.78x, and substantially cheaper than the Vanguard Total World Stock ETF (VT), which comes in at a hefty P/E of nearly 18x. Nonetheless, if you’re contemplating a position in this relatively cheap high-flyer, here are a few macro and technical things to note. Macro Commentary It is difficult to be too bullish on Japan when growth prospects here still look rather anemic. For context, a few weeks back, the IMF curtailed its previous real GDP forecast for Japan by -0.2% to just 0.7% for the year. Even the Japanese government per se, which follows the March ending calendar, was recently forced to bring down their March 2025 year-ending forecasts to just 0.9%, from previous estimates of 1.3% provided at the start of the year. Questions may certainly be asked about the Japanese households’ purchasing power, when the weakness in the yen has triggered an avalanche of highly priced imports from food to energy. Having said that, one would think that recent changes in the wage trends in Japan may come to the fore in the second half of the year. Japan has traditionally been an economy that hasn’t facilitated a great deal of wage growth, but the most recent Shunto spring wage negotiations will see a wage hike of 5.3%, which would represent the largest hike in three decades! After pivoting from 8 years of negative interest rates in March this year, we understand that key members of the BOJ, are still not entirely on board with future rate hikes but with core inflation rising for a second straight month, coupled with a potential wage hike spiral, we don’t believe the bank can keep putting things off for too long. The inevitable hike in rates will give another shot in the arm for Japanese banks which account for the largest chunk of the EWJV portfolio (over one-fourth of the total holdings). Note that in recent years, these Japanese banks’ lending operations have been negatively impacted by ultra-low rates, and one can see this in how the net interest income (NII profile) has trended lower. NII is expected to bottom out this year, before commencing a 1% expansion next year followed by a faster pace of 2% in the following year. StatistaMeanwhile, Japan’s NISA tax free investment program could also see the wealth management verticals of these banks gather steam as previously cagey households seek to tap suitable capital market options to build their wealth. It’s also encouraging to note that some of the largest banks in Japan also intend to ramp up buyback spend this year, or even engage in stock splits. Closing Thoughts- Technical Commentary One can see the temptation to buy into EWJV, but we wouldn’t be quick to jump the gun as the charts suggest a further pullback would be preferable. If one looks at EWJV’s weekly price imprints, it looks like the ETF is forming something akin to a bullish flag pattern. From October 2022 until March this year, we saw the product make a sturdy run higher, expanding by around 60%. However, since peaking in late March, it hasn’t quite managed to kick on even further, rather, facing some resistance whenever it has attempted to break out of the upper end of its range (area highlighted in yellow. After failing to break out of the $33 levels once again in early July, we suspect, the ETF could now see another leg lower. If the ETF drops closer to the sub $30 levels, which is where the downward sloping support is currently around, we think that would represent a better terrain to deploy one’s funds. Investing Our reluctance to cozy up to EWJV is also dictated in part by what the relative strength charts are suggesting. The image below suggests that EWJV’s portfolio of value stocks, no longer looks beaten down relative to the broad Japanese universe, with the current relative strength (RS) ratio trading at a 9% premium over its long-term average. YCharts

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