While the Federal Reserve has signaled it is looking at a December rate hike, the Bank of Japan could extend quantitative easing to prop up growth and inflation. Consequently, investors may look to the Japanese markets with a currency-hedged country-specific exchange traded fund that will help diminish foreign exchange risks.
“While the Bank of Japan declined to increase its 80-trillion-yen quantitative easing (QE) program, the bank did lower its forecasts for both inflation and growth,” according to Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock. “This raises the possibility of more QE in the near term. Such further stimulus would likely provide another positive jolt to the Japanese stock market, which is comfortably outperforming the U.S. year-to-date. That is a key reason why we continue to favor Japanese equities.”
Meanwhile, the Fed has stated it is looking to hike interest rates, which will continue to support a strengthening U.S. dollar. A stronger dollar and the tightening monetary cycle could impeded earnings growth and further multiple expansions, Koesterich warned.
Additionally, with the trailing price-to-earnings ratio on the S&P 500 at about 18.5, or slightly below the summer peak, U.S. equity valuations are much more elevated that foreign markets.
Investors should diversify into international markets, like Japan, to capture potentially greater growth opportunities abroad, but people should also keep in mind potential currency risks as the U.S. dollar strengthens.
ETF investors, though, can take a look at currency-hedged Japan ETF options that may provide a direct play on relatively cheap Japanese markets and hedge against a depreciating yen currency. For instance, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) has a 13.6 P/E, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) has a 13.3 P/E and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) has a 13.4 P/E.
DXJ tracks the WisdomTree Japan Hedged Equity Index, which consists of dividend paying Japanese companies that derive the majority of revenue from outside of Japan and hedges against fluctuations in the relative value of the yen against the U.S. dollar.
HEWJ holds iShares MSCI Japan ETF (NYSEArca: EWJ) but hedges against a depreciating yen.
DBJP tries to reflect the performance of the Deutsche X-trackers MSCI Japan Hedged Equity ETF, which also tracks Japanese equities while mitigating the exposure to fluctuations between the value of the USD and the JPY.
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. 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.