Japan ETF Play Of 2013 Hardly Out Of Gas
Reports of the death of the currency-hedged Japan trade may be premature.
Reports of the death of the currency-hedged Japan trade may be premature.
Reports of the death of the currency-hedged Japan trade may be premature.
There’s a new meme running through the investment sphere, and it goes like this:
A strong dollar is great and all, except that it’s going to collapse the world’s economies, so you might want to rethink that hedged-equity trade.
That’s the focus of a few articles this week on the Web, so I thought I’d check-in on the Japan trade I wrote about earlier this month. Back then, the yen was flat for the year, so the benefits of a hedged-Japan strategy really weren’t evident. Here’s how the last month has been, however:
Yen Movements
In the last four weeks, the yen has fallen almost 5 percent. That slow decline has meant that, in dollar terms, any investment in Japan has been muted. That’s what the black line in the chart—the iShares MSCI Japan ETF (EWJ | B-97)—would suggest.
The actual local market, as measured by the red line of the Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP | B-71) is actually up about 3 percent for the trailing month. And as expected, the exporter/dividend-heavy version of Japan proffered by the WisdomTree Japan Hedged Equity (DXJ | B-62), the blue line, is doing even better, up by nearly 4 percent.
So to put it bluntly, I don’t see this trade being “played out” in any way. This latest round of Abenomics is actually just getting started, and it’s doing exactly what investors should expect it to do: pressuring the yen downward, and boosting the local stock market.
I can already read the emails from the future, however: “But Dave, where’s my monster 2013 return!?”
Consider this: On a year-to-date basis, the yen is only down 3 percent, and spent most of this year, right up until mid-August, completely flat. On this day in 2013, the yen was down 12.3 percent for the year, with most of that decline happening over the first six months of the year.
So I think the trend for Japan is just getting started again. Many currency analysts are calling for the yen to drop as low as 120 to the dollar, and if that is indeed the trend, the hedged-equity trade should remain very much alive.
The Elephant
If there is something to worry about, it may be the longer-term impacts of the strong dollar.
That’s the focus of a note out from Soc Gen yesterday, and a raft of analysts earlier. The concern is that global companies with strong overseas sales could be significantly hurt by a strong dollar. After all, if a Japanese kid wants to buy an iPhone, it now costs him more yen to get the dollar back to the U.S., that means Apple or Nike or Coke—or whatever company wants to sell outside the U.S.—must accept a lower price, in dollar terms, or sell fewer units.
Both of those have potential earnings impacts. That’s why we’re starting to see some analysts lower their earnings predictions, particularly for global mega-cap stocks.
It’s hardly a Katie-bar-the-door panic, but it is food for thought, and just a further reminder that investing can often be a zero-sum game. Not everyone can be above average all the time.
But the Japan trade? I think it’s still on, as long as the yen continues to be weak.
At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.
