by Hyun Kang, Research Analyst, WisdomTree
Key Takeaways
- Goldman Sachs recently identified another basket of stocks, the “Seven Samurai,” which includes seven Japanese companies that have contributed significantly to equity returns in the domestic market.
- The Seven Samurai delivered a cumulative return of 137% over the past three years, outperforming the Magnificent Seven basket of American tech giants.
- The Seven Samurai companies make up approximately 13% of the WisdomTree Japan Hedged Equity Index, which focuses on Japanese equities that derive at least 20% of their revenues from outside Japan and hedges against negative yen-dollar exchange rate movements.
- The weakening of the yen relative to the U.S. dollar over the past three years has enhanced the returns of the WisdomTree Japan Hedged Equity Index, as hedging the yen and the exposure to export-oriented companies with increased revenues from a weaker yen have contributed to the Index’s enhanced returns.
Catchy monikers for high-performing stock baskets aren’t going away any time soon.
In 2020, Goldman Sachs identified a group of 11 high-growth European stocks, naming them the “Granolas.” These stocks would go on to account for 60% of European equity gains between 2023 and 2024, outperforming the widely discussed Magnificent Seven basket of American tech giants over the 12-month period ending February 2024.
This year, the bank identified another basket of stocks, this time seven Japanese companies that have contributed significantly to equity returns in the domestic market: the Seven Samurai, after the 1954 Akira Kurosawa film of the same name. Interestingly, this movie was later remade in the U.S. as The Magnificent Seven (sound familiar?). Selected based on having strong performing and highly liquid shares, the Japanese companies included in this basket are Advantest, DISCO, Mitsubishi, SCREEN Holdings, Subaru, Tokyo Electron and Toyota Motors.
Over the past three years, the Seven Samurai delivered a whopping 137% cumulative return, compared to the Magnificent Seven’s 64%.
Cumulative Three-Year Total Returns, Seven Samurai vs. Magnificent Seven
The Seven Samurai make up roughly 13% of the WisdomTree Japan Hedged Equity Index, which provides exposure to Japanese equities, favoring companies that derive at least 20% of their revenues from outside Japan. In addition to its exporter-tilt, the WisdomTree Japan Hedged Equity Index also hedges against negative yen-dollar exchange rate movements.
Seven Samurai in the WisdomTree Japan Hedged Equity Index
The yen has weakened considerably over the past three years. Expectations that Japan would reverse long-standing ultra-loose monetary policy and that the U.S. would cut rates by over 2% resulted in a modest rally at the end of 2023. That rally was short-lived, however, as the yen weakened by a further 4.4% in January to start the year.
Yen-Dollar Spot Rate
Changes in yen-dollar exchange rates have significant implications for indexes as well as individual securities. A weakening yen relative to the U.S. dollar causes USD returns to be depressed relative to local currency returns. Thus, a weakening yen enhances the returns of hedged equity indexes, which mimic local returns by entering currency contracts to negate unfavorable FX movements, relative to unhedged indexes. Furthermore, when the yen is weak relative to the U.S. dollar (and other foreign currencies), companies that derive most of their revenue overseas (i.e., exporters) can convert their earnings in foreign currencies to yen at more favorable exchange rates.
As mentioned earlier, the WisdomTree Japan Hedged Equity Index consists of companies that derive at least 20% of their revenues from outside Japan and is also currency hedged. For the last three years, the Index saw enhanced returns from the compounding effects of hedging the yen and its sole exposure to export-oriented companies that also see increased revenues from a weaker yen.
Cumulative Three-Year Total Returns, WisdomTree Japan Hedged Equity Index vs. MSCI Japan
Geographic Revenue Attribution
The chart below shows total return breakdowns for different MSCI country/region indexes, as well as the S&P 500 over the last year in U.S.-dollar terms. Looking at the column for the MSCI Japan index, we can see downwards pressure on total returns amounting to almost 16% from FX. By currency hedging returns, investors can mitigate FX headwinds and aim to isolate the returns of the local stocks themselves, which benefited from margin expansion, multiple expansion, sales growth and a healthy 2% dividend return.
1-Year Returns Decomposition
For definitions of indexes in the chart above, please visit the glossary.
