By Zacks Equity Research
Japanese Prime Minister Shinzo Abe. Photo courtesy AFP.
After a surprise QE announcement by the Bank of Japan which fueled a rally in Japanese stocks, the country’s Nikkei is back on fire amid bets that Prime Minister Shinzo Abe will delay a planned consumption tax hike slated to take effect in 2015. Moreover, Abe is also likely to call for a general election in December to strengthen his grip on power.
The news pushed the Japanese stocks to a fresh seven-year high as investors cheered that a planned sales tax hike delay would provide at least some relief to the ailing Japanese economy.
The first increase in the two-stage consumption-tax hike took place in April and was harsh enough to push Japan to its deepest slump in the second quarter since the 2009 global financial crisis. The country’s economy shrank 7.1% annually in the second quarter after the levy was raised to 8% from 5%, raising fears over the viability of ‘Abenomics’ in the near term.
In fact, the tax hike caused household consumption and private investment to slip a respective 19.2% and 9.7% annually.
However, a delay in the second tax hike and a snap election are expected to strengthen the prime minister’s hold over the nation. Market experts believe that such a move will bring the Japanese economy back to growth by pushing consumer spending higher.
Moreover, the recent 80 trillion yen asset buying program announced by the Bank of Japan is expected to fight weakening growth conditions and arrest sliding consumer prices in the country. Also, the move by Japan’s Government Pension Investment Fund (GPIF) to increase its allocation to Japanese and overseas equities would spur investment within the economy (read: 2 Hedged Japan ETFs to Buy After the Surprise BOJ Stimulus).
The expected delay in the sales tax hike is certainly a positive for Japanese equities and might lead the stocks and the related ETFs even higher, at least over the short run. In fact, even after the recent gains, Japanese stocks look undervalued, considering their long-term earnings prospects. Also, based on valuations, Japanese stocks are relatively inexpensive compared to their U.S. and European counterparts, even if we consider the more than 70% gains clocked since Abe came to power in December 2012.
However, investors would be better off by investing in Japanese hedged ETFs as the yen might fall further. Hedged funds will provide exposure to Japanese stocks while eliminating currency exposure.
Below we have highlighted two top-ranked ETFs in this space for investors keen to ride the current rally (read: Buy These 3 Top-Ranked Mid Cap ETFs to End 2014).
WisdomTree Japan Hedged Equity Fund (DXJ)
The fund is one of the largest and most popular ETFs in the Japan ETF space with an asset base of $11.8 billion and an average trading volume of 5.3 million shares a day. The fund tracks the WisdomTree Japan Hedged Equity Index to provide exposure to Japanese stocks while at the same time providing a hedge against any fall in the Japanese yen (read: Inside The Top Ranked Japan Hedged Equity ETF).
With this focus, the fund holds a basket of 385 stocks with Toyota Motor Corp, Mitsubishi and Japan Tobacco being the top three holdings. Sector-wise, consumer discretionary and industrials occupy the majority of the fund with a little under 50% of combined exposure. The ETF added 13.9% in the past four weeks and 7.7% so far in the year and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.
Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP)
DBJP is another choice for investors seeking a hedged exposure to Japan. The fund tracks the MSCI Japan U.S. Dollar Hedged Index to provide exposure to a basket of 314 stocks. Toyota Motor Corp (6%) and Mitsubishi (2.6%) occupy the top two spots here as well, followed by Soft Bank (see all Asia-Pacific (Developed) ETFs here).
Consumer discretionary, industrials and financials account for more than three-fifths share of the basket, each with double-digit exposure. The fund has amassed $598.1 million in its asset base and charges 45 bps in annual fees. DBJP had added 14.7% in the past one month and is up 5.8% in the year-to-date time frame and has a Zacks ETF Rank of 2 or ‘Buy’ rating.
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WISDMTR-J HEF (DXJ): ETF Research Reports
DEUTS-XT MS JPN (DBJP): ETF Research Reports
ISHARS-JAPAN (EWJ): ETF Research Reports
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