In a recently published report, Bank of America Merrill Lynch expressed a bullish long-term view on the Japanese stock market, with a forecast that the Nikkei index could jump as much as 20% by the end of next year.
The bank said the Nikkei 225 index, the traditional benchmark for the Japanese stock market, could hit 20,000 by the end of 2017 – that’s some 20% above its current level of just under 17,000.
So far this year the Nikkei is down 10.9% in yen terms (to 9 September), but Merrill Lynch is forecasting a powerful rebound, saying investor pessimism on the asset class is stretched.
The Bank also believes the yen will fall from current highs by the end of next year, down to ¥115-120 against the US dollar (it is currently trading at around ¥101.7), which will spell better conditions for equities in the region.
If the bank’s forecast plays out, now could be the best time to buy into the market at depressed levels. But what are the options for investors wanting to access Japan through an ETF?
TrackInsight’s research only covers one ETFs tracking the Nikkei 225, provided by iShares, but investors are in luck here, since one of these has a strong four-star rating (www.trackinsight.com). The iShares Nikkei 225 UCITS ETF, in Japanese yen, has a TER of 0.48%. It scored highly in terms of tracking difference and tracking error, too.
However, there are ETFs tracking other indices which are also worth considering for exposure to Japanese equities.
The db x-trackers MSCI Japan Index UCITS ETF, denominated in US dollars, is one of the highest scoring Japan ETFs investigated by TrackInsight. It has a five-star rating, and a TER of 0.35%, also scoring highly on the tracking error, tracking difference and other indicators affecting the rating.
The only other Japanese ETF with a five-star rating from TrackInsight also tracks the MSCI Japan – the UBS ETFs plc – MSCI Japan SF UCITS ETF, in Japanese yen. This one has a TER of 0.33%.
Meanwhile, the MSCI Japan index was up 2.7% over the year to 8 September, in US dollar terms, compared to a return of –10.9% from the Nikkei 225 over the same period, but in Japanese yen.
The question of whether to invest in Japanese equities through a hedged or unhedged vehicle has been a key one on investors’ radars, as the yen has been relatively volatile over the past couple of years as a result of the actions of Japan’s central bank.
In July, the central bank’s governor Haruhiko Kuroda introduced negative interest rates in an effort to weaken the yen and trigger inflation. However, the currency has remained strong despite. On 20 September, the bank is set to conduct another comprehensive assessment of its policy.
The Bank of America Merrill Lynch said the strong yen has led to investors making speculative yen purchases, as well domestic investors hedging of foreign holding, but said it is only a matter of time until this changes.
If we are to believe the bank’s analysts and the yen is going to fall again, then US dollar denominated ETFs are the way to go to avoid the affects on investments from a falling currency.