A podium finish for investing in Japan

Ahmed Farooq, CIMA®, CFP

Ahmed Farooq, CIMA®, CFP
Vice President - ETF Business Development at Franklin Templeton Canada

Connect on LinkedIn

The 2020 Tokyo Olympic Games is scheduled to begin July 23, a full year after its original start date. If the event will go ahead is still subject to change, of course, as is the case with most things since COVID-19 became a dominant force in our lives.

Since the historically sharp drawdown at the outset of the pandemic, equities markets have performed well, and in Japan’s case, the Nikkei Index is currently at highs not seen since the early ‘90s.

In its most recent update, the IMF forecasted that Japan would register 3.3% GDP growth this year and 2.5% in 2022, having contracted by 4.8% last year. Japan has had significantly less COVID deaths than many other major economies, particularly the U.S. and the U.K., but its vaccine roll-out has been much slower and coronavirus infections are rising sharply presently.

How effective vaccines are outside of Japan is also crucial for the country’s economic health, given the importance of its export industry. Should China and the U.S. record strong growth this year as predicted, Japan’s auto sector will likely reap the benefits as a brighter economic picture brings increased demand for vehicles from the likes of Mitsubishi, Honda and Toyota.

According to a recent report by Thomson Reuters, publicly traded companies in Japan are predicted to report earnings growth of ~40% in 2021 compared to ~23% for the S&P 500. In addition, the Nikkei 225 has a lower price-to-earnings (P/E) ratio than the S&P 500, making Japanese stocks even more attractive as an investment.

This view is supported by Ed Perks and Gene Podkaminer of Franklin Templeton Investment Solutions, who explained in their March 2021 Paper, Some Like it Hot: “Japan appears well-placed to benefit from a cyclical economic rebound, policy continuity and a relatively muted COVID-19 impact. Although earnings per share have been weakening relative to peers, equity valuations, particularly on a price-to-book-value basis, remain attractive relative to other markets, in our view. We have extended a more constructive view on this market.”[1]

Of course, there are some significant areas of concern for Japan aside from the coronavirus, principally the country’s aging population and a public dept-to-GDP ratio (280% in FY2020) that is the highest in the world. In response to these structural challenges, the new government of prime minister Yoshihide Suga has indicated that investment in the digital economy and green energy will be a priority to safeguard Japan’s position as a global economic powerhouse.

In the near term, the signs are mostly positive, as the Bank of Japan’s March update showed that business confidence had improved to pre-pandemic levels in the first quarter of 2021, while the Purchasing Managers' Index for the manufacturing sector rose to 52.7 in March, its highest level since October 2018.

For those interested in adding Japanese exposure to their portfolio, but are unsure about what companies present the best opportunities, Franklin FTSE Japan ETF (FLJA)  is a low-cost (9 basis points) solution to access large- and mid-sized companies on the FTSE Japan Index. With a one-year return of 22.49%,[2] the ETF benefited from the recovery in Japan’s economy in the second half of 2020 and is positioned to take advantage of any further boost from the global economy reopening.

The importance of portfolio diversification remains through up and down markets; bearing this in mind, investing in the Land of the Rising Sun should help with the geographical mix of your assets, as well presenting access to some of the globe’s most well-established and profitable companies.


1.   https://www.franklintempleton.com/investor/article?contentPath=html/ftthinks/common/allocation-views/some-like-it-hot.html

2.   As of February 28, 2021

ETF Year-End Distributions

A primer on how ETFs differ from mutual fund distributions

The True Liquidity of ETFs: Implied Liquidity

ETFs are at least as liquid as their underlying basket of securities. There is a more comprehensive way to measure how liquid an ETF is than simply looking at the average daily volume of the ETF itself.

In the air again...

COVID-19 is still very much with us, however, so it wasn’t exactly back to normal. The normal excitement and energy I would have for a trip was tempered by the anxiety of travelling during a pandemic and all that entails.

After almost two decades in the Canadian ETF industry, what’s next?

The growth of ETFs has been one of the key developments in the investment industry over the past few decades.

There is a lot of momentum moving towards ESG investing... and the hype is real.

The growth of ESG has been one of the major investment stories of recent years.

Finding Value in a European Resurgence

With stage three rollout in Ontario, it is going to be interesting to see how we integrate back into new societal norms.

Evolution of Franklin Templeton means greater specialization

Change, I find, is often a positive and that holds true in most areas of life.

All Duration isn’t Created Equal

An interview with global fixed income portfolio manager John Beck

The Fatigue Factor Under Lockdown

Communicating with clients and colleagues has not been too much of an issue during the pandemic. There are limits to the digital experience, however, and as we face our third severe lockdown here in Ontario, burnout is becoming more apparent.

A podium finish for investing in Japan

The 2020 Tokyo Olympic Games is scheduled to begin July 23, a full year after its original start date.

Inflation concerns in the post-COVID economy

Given the historically high levels of fiscal and monetary stimulus during the pandemic, inflation concerns have been building so far in 2021.

Innovation in the ETF Ecosystem

ETFs in Canada have come along way over the past five years. They are a vital part of the portfolio construction process for many investors and their popularity continues to grow.

A Revolution in Innovation

We will all remember 2020 for many reasons, but key amongst them was how our dependence on technology was undeniably set in stone.

2020: An Unforgettable Year To Forget

Where do I start after a year like 2020? One thing is for sure, we will all remember the past year for the rest of our lives, both from a personal and professional standpoint

U.S. election worries and the case for active management

It is amid this uncertainty, and with the possibility of much more geopolitical and economic turbulence to come, that I would like to make the case for active management.

NEO last price methodology

Given all the possible questions about the exchange-traded funds (ETF) ecosystem, the official closing price of an ETF is probably pretty far down the list. The closing price is the last price of the day, right? As it turns out, there was room for improvement...

A road warrior, now home bound—wholesaling during COVID-19

This pandemic has really changed the way we do business; being constantly on the go has switched to being stuck at home.

Overcoming factor fatigue and is it time to go International?

Factor investing may seem complicated due to the sheer number of products available, all with different nuances to their methodology.

5 Lessons I’ve Learned since launching LibertyShares ETF's

Ahmed Farooq reflects on some of the lessons he has learned since LibertyShares launched 3 years ago.

Did ETFs break down in this latest round of volatility?

Ahmed Farooq, VP of ETFs, looks at how the Canaidan ETF market did during a volatile March.

Discussing Corporate Credit: A Q&A with Portfolio Manager Adrienne Young

Ahmed Farooq interviews FLCI Portfolio Manager Adrienne Young.

Understanding Factor-based Investing

Factor based investing has received a lot of buzz over the past couple of years, but I still hear a lot of confusion when I speak to advisors about how to use them.

A cure for the headaches of fixed income investing

Why actively managed fixed income ETFs are gaining popularity.

Our Latest Building Blocks

The addition to our ETF platform is a continuation of this commitment—a suite of regional and country- specific passive ETFs that can be used within a diversified portfolio for low-cost, precise exposures.

Three Challenges Facing Passive Fixed Income Funds

We are on the tail end of a 30-year bull market for bonds. This unusual period of sustained growth was facilitated by both a low interest rate and low inflationary environment.

Get strategic with tax-loss harvesting

An overview of tax-loss harvesting.

Portfolio building blocks: Mutual Funds or ETFs? Should there be a dilemma?

Mutual Funds and ETFs aren’t quite as different as some advisors initially believe.

Are Smart Beta ETFs actually smarter?

When it comes to new ETFs entering the Canadian market place, Smart Beta strategies are continuing to offer some buzz to the industry.

Fixing fixed income - Are passive fixed income ETFs broken?

One thing that I consistently hear from the advisory community is that fixed income is not one of their key strengths.

What to launch next? An ETF provider's biggest dilemma!

Making Room in a Crowded ETF Space.

Factor based approach to Global Dividends, getting under the hood.

A deep dive into the dividend selection process.

Why investors should consider a global dividend strategy

We are only a few months into 2018 and already there are indicators that the benign financial environment investors enjoyed over the last few years is changing.

Go Global with our new lineup of ETFs

Over the past 5 years, I have had many conversations with advisors who say that their clients are looking to diversify their dividend strategy.

What Are the Risks?

Commissions, management fees and expenses may all be associated with investments in ETFs. Investors should carefully consider an ETF’s investment objectives and strategies, risks, fees and expenses before investing. The prospectus and ETF facts contain this and other information. Please read the prospectus and ETF facts carefully before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors. The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.