HEAD-TO-HEAD: iShares vs Vanguard

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Kenneth Lamont at ‎Morningstar

One of the surprises that has emerged during the recent period of globally synchronised growth is a substantial pick-up in Japan’s economy, which had been flat for at least 20 years.

The recovery in Japanese corporate earnings and the still cheap stock valuations have attracted global asset managers who have been increasing their exposure to Japan’s equity market.

For example, T Rowe Price’s global equity strategy has an overweight to Japan equities versus the benchmark for the first time in a decade.

“It surprised a lot of people that [in Q2 2017] Japan took over the US in delivering profit, while Europe had disappointed for the past five years until this year,” said Laurence Taylor, portfolio specialist at T Rowe Price.

“[However], when you look at the Japan market, it is cheaper than Europe by some margin, if you compare both markets to their valuation peaks in 2007. Europe is above its peak, Japan is somewhat below its peak,” he added.

EFG Asset Management also has an overweight position in Japanese equities, according to the firm’s head of research and deputy CIO, Daniel Murray.

“Typically, the Japan market follows a pattern: it jumps higher in a short space of time, then range-trades, then jumps higher, then range-trades,” he said, adding that investors should hold the stocks and be patient.

Murray believes Japanese companies are benefiting from an increase in corporate profitability, share buyback activity and structural change in the labour market.

While profiting from the growth in Japan’s economy, investors should keep an eye on deflation, which is one of the biggest investment risks to the country’s equity market, according to Akira Fuse, Tokyo-based investment specialist for Japan equities at Capital Group.

To cope with long-term deflation in the country, Prime Minister Shinzō Abe has put in place an aggressive monetary policy, expanded fiscal spending and deregulated certain industries.

But the efforts so far have been unable to boost inflation, which is still very close to zero, Fuse said, quoting official data.

How do the two largest passive players in the world fare against each other on Japan index funds?

FSA talks to Kenneth Lamont, fund analyst at Morningstar, who provides a comparative analysis of the iShares Japan Equity Fund and the Vanguard Japan Stock Index Fund.

Data: Morningstar, fund factsheets

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