How Dynamic Currency Hedged ETFs Work

February 03, 2017 And we're seeing that in Europe a bit. We're seeing it in the U.S.

Siracusano: You're seeing it in Europe. You're seeing the disinflationary trend stopping in Japan, and now you're starting to see the corporations put that cash on their balance sheet back to work. They're buying back stock. They're raising their dividends. If there's any kind of infrastructure plan in America, Japanese exporters will probably benefit from that and sell into it.

But also in Japan, you’re seeing part-time workers finally getting full-time employment. And that's a big thing, because it helps the younger Japanese get out of the home that they were living in with their parents, get married and then start to have their own household.

You're starting to see pickup in real estate prices, which is a good signal in Japan; they haven’t had that in a long time. And the Japanese companies are really set up in 2017 to have very, very strong profit growth with where the yen is today; it's about 113 to the dollar. Most of the analysts were making their forecasts when the yen was about 103. For the most part, they really haven't adjusted those numbers upward yet to reflect the weaker yen. How does Trump pulling out of the trade Trans-Pacific Partnership trade deal affect Japan?

Siracusano: Well, Japan wanted it. It was important for Japan. It's interesting, because South Korea was not part of that trade PAC. Japan wants to reserve the right to negotiate directly with Korea on trade because it's so central. But if they can negotiate with a dozen countries at the same time, they may end up benefiting, because not all the countries are watching their relationship vis-à-vis Japan. The thinking was, net/net, Japan would have benefited more than the U.S. would have benefited by that trade pact.

This is not to say there won't be a renewed trade agreement, but it'll be bilateral. The Japanese will have to negotiate directly with Trump, just as they're prepared to negotiate directly with the Koreans. That's the direction Trump wants to go. He thinks he can get a better deal by just negotiating directly. And that would be the case with Europe, too, in some ways, right? So you're seeing more of these collective trade agreements.

Siracusano: Yes. I think you'll see that with the U.K. now. I think the U.K. will want to do a lot of bilateral agreements directly in the English-speaking world, and then branch out from that. It remains to be seen what happens to global trade once you get more of these bilateral agreements.

The key thing for Trump will be, can he pass tax cuts quickly? Or will tax cuts be held hostage by tax reform? And then, what's going to take longer to pass? Because if the tax reform happens, there's no guarantee it'll be retroactive through 2017. It may not start till 2018. And if so, that would have an impact on the market, because it's starting to discount the impact of a lower corporate tax rate, though not completely.

We're very constructive on 2017. We think it's going to be a good year for equities. We think it's going to be a good year for the U.S. economy. We like U.S. midcaps and U.S. small-caps. And we continue to like Japan in particular, if you're hedging a currency.


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