Exchange traded funds such as iShares MSCI Japan ETF (NYSEArca: EWJ), WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) were dragged lower by the decline in Chinese stocks last month, but that has not stopped some options traders from making bullish bets on a recovery in Japan funds.
The Nikkei was seen as a valuation play after the index gave up all its gains for the year on Tuesday, with analysts pointing out that Japanese companies’ record profits were not reflected in their relatively low stock prices compared to earnings.
Additionally, Japanese equities were rising on an optimistic Chinese economy, a major export market for Japan. China’s finance ministry said earlier this month that Beijing will implement a “more forceful” fiscal policy to stimulate growth, allocate funds to support infrastructure and cut taxes for small businesses. [Japan ETFs Get a Positive Jolt]
OptionsMonster data show “that about 12,000 October 52 calls were purchased for $0.42 to $0.45 yesterday. This represents new positions as open interest in the strike was only 127 contracts before the session began. These long calls lock in the price where the stock can be purchased through mid-October no matter how far it might climb. They could be sold earlier at a profit if premiums rise with a rally before then, providing potentially significant leverage, but the contracts will expire worthless if shares remain below $52,” according to the options broker’s web site.
Looking at equity valuations, Japanese stocks look cheaper than the U.S. For instance, EWJ shows a 16.0 price-to-earnings ratio and a 1.4 price-to-book, whereas the S&P 500 index is trading at a 18.7 P/E and a 2.5 P/B.
For ETF investors, currency-hedged Japan ETF options may be a better play to hedge against the negative effects of a depreciating yen while capturing potential growth from loose monetary policies.
WisdomTree Japan Hedged Equity Fund
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.