The Japanese equities and related exchange traded funds have outperformed, but some financial advisors and fund managers believe the market still has more room to run.
The iShares MSCI Japan ETF (NYSEArca: EWJ) increased 15.1% year-to-date. Meanwhile the Nikkei stock index gained about 18%.
Nevertheless, Arne Espe, senior portfolio manager at USAA Investments, argues that the government’s efforts to jump-start its economy through monetary easing, along with good earnings-growth projects, make the Japanese market attractive, reports Daisy Maxey for the Wall Street Journal. Consequently, USAA Investments is overweight Japan relative to its benchmark, including a 5% position in Japanese stock index-index futures and 5% in shorting the yen. [Japan Stocks, ETFs’ Outperformance Only Getting Started]
“For me, the investment play is thinking the yen will go down in value, which has positive implications for equities,” Espe told the WSJ.
The CurrencyShares Japanese Yen Trust (NYSEArca: FXY), which tracks yen movements against the dollar, declined 3.4% year-to-date. The yen currency is currently trading around 123.7 to the U.S. dollar.
While the yen may be negative for foreign investors – a depreciating yen weighs on USD-denominated returns, the weaker yen is a positive Japanese exporters.
Alternatively, traders can utilize the ProShares UltraShort Yen (NYSEArca: YCS), which tries to reflect the daily -2x or -200% daily return of the USD/JPY currency pair, to hedge further price depreciation in the yen currency. YCS rose 5.4% so far this year.
Investors can also utilize currency-hedged ETF options to track a growing Japan with worrying about a depreciating yen. The WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), which hedges against a depreciating yen currency, gained 16.9% so far this year. Additionally, the yen-hedged iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) increased 18.5% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) advanced 18.4%.
Espe also believes that Japanese equities have a good long-term outlook. Japan’s public pension fund, which holds over $1 trillion in assets, also has a favorable outlook on Japanese stocks, adopting a more aggressive investment strategy by shifting away from government debt into foreign and domestic equities.
Moreover, Japanese stocks remain cheap relative to the U.S. market based on revenue and earnings, Espe added.
For instance, EWJ shows a 15.8 price-to-earnings, whereas the S&P 500 index is trading at a 18.9 price-to-earnings, according to Morningstar data.
Brian Goodstadt, an adviser at Paragon Capital Management, says Japan’s market is “probably the cheapest stock market in the developed world.”
Adrian Cronje, chief investment officer at Balentine LLC, also pointed out that Japan is enacting structural reforms, which may provide the potential for additional stock-market gains, such as steps to encourage greater emphasis on shareholder value, including pushing for buybacks and dividend hikes, pension reform and deregulating.
For more information on Japan, visit our Japan category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.