Analyse: iShares MSCI Japan EUR Hedged

Japan-Aktien? Aber bitte mit Yen-Hedge! Dieser ETF eignet sich für Anleger, die auf eine weitere Abwertung der japanischen Währung gegenüber den anderen wichtigen globalen Währungen wetten wollen.

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Rolle im Portfolio

The iShares MSCI Japan Monthly EUR Hedge ETF provides equity exposure to one of the biggest economies on the globe and could therefore be considered for use as a core component of a well diversified portfolio to gain exposure to the world’s third-largest economy. However, before considering an investment in this ETF--either as core building block or a tactical tool--investors should be aware of existing exposure to Japan through other holdings (for example, Japanese equities comprise nearly 10% of the MSCI World Index) to avoid unintentionally overweighting Japanese shares.

Taking a close look at the track record of the Japanese stock market over the last 20 years, one might wonder whether owning Japanese equities as part of a buy-and-hold strategy would be of any benefit. The MSCI Japan Index returned about 3% of its value over that period, compared to a 222% increase in the MSCI World Index. After the Japanese real estate and stock market meltdown in the 1990s, the Central Bank hesitated to intervene. By the time the Central Bank made a concentrated effort to stimulate the economy, flooding the market with trillions of yen and decreasing interest rates, the economy was already in a deflationary spiral and consumers had lost faith. Low interest rates from there on made the Yen an attractive target for carry traders, helping to strengthen the currency and ultimately hurting exports. However, the stock market rallied since November 2012 while the Yen weakened on the back of a new approach by newly selected Prime Minister Shinzo Abe.

The index is well diversified with little concentration in specific stocks. Its top holding is Toyota representing 6% of its value. The index’s top sector allocation is currently financials, representing 22% of the index’s value. Given this high degree of diversification across individual names, the ETF is best used if the investor believes in a broad-based improvement in the Japanese economy.

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Fundamentale Analyse

The Japanese stock market posted in 2013 its best year since 1972. The Nikkei 225 Index returned 56.7%, benefiting from the implementation of the so-called “Abenomics”. International investors pumped billions of dollars into Tokyo’s stock exchange last year, betting on a catch up with international stock markets - Japan’s stock market has underperformed those of other developed markets for years. The loose monetary policy also benefited export driven companies as the Yen lost about 21% versus the Euro and the US-Dollar.

Most equity analysts forecast another good year for Japanese stocks, expecting earnings to rise by 17% in 2014 after expanding by 40% in 2013. It is also argued that the current money base would not be sufficient and that the central bank will further loosen monetary policy to achieve its 2% inflation target by spring 2015. Escaping the long-lasting deflation is the cornerstone of a return to a normal economic environment. The consumer price index hit a new five-year high in November, reaching 1.2%. In addition, a government survey indicated that almost 90% of consumers expect prices to continue rising in months to come. In particular, further Yen depreciation could fuel inflation, as import goods become more expensive. Companies with a strong pricing power should benefit most from higher inflation.

Elsewhere, the sector pillar of the Abenomics may disappoint in 2014. The approved economic stimulus package, worth €39bn, is only half the size of 2013 and is only designed to compensate for the increase of the consumption tax from 5% to 8% in Q2 2013. Besides, the government aims to increase this tax gradually to 10% by October 2015. Many consumers bought big ticket items ahead of the initial tax increase. This may detract on private consumption growth going forward.

However, 80% of blue-chip companies expect the tax increase not to hurt the nation’s recovery. For starters, the expected higher tax revenue should help funding a rising social welfare bill in a country facing a severe demographic challenge. Japan’s increasingly aged, and overall declining, population has a strong bearing on a public debt burden already more than double the country’s GDP and the largest amongst developed countries. Both the International Monetary Fund and the Bank of Japan have supported the tax increase in light of the ballooning debt burden. Over the long-term, the shrinking population is a key risk to consumer demand and could make it difficult to sustain a non-deflationary environment.

The third pillar of the Abenomics, establishing a special economic area, could become victim of bureaucracy as experiences in the past have shown. Big structural reforms are therefore not expected.

All risks considered, the Japanese economy should still benefit from the positive momentum. UBS forecast GDP to expand by 1.7% in 2014. Hosting the Olympic Games in 2020 could further support the economy going forward, as more infrastructure spending will be necessary. However, Nomura estimates that construction spending on stadia and other facilities over the next eight years will account for only 0.3% of GDP.  

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The MSCI Japan Index includes approximately 320 of the largest stocks of publicly-traded companies based in Japan. Components must meet minimum criteria for liquidity, foreign ownership restrictions, and a waiting period for newly-listed stocks. The securities are weighed by free-float adjusted market capitalisation. Because closely held firms will have a smaller piece of their aggregate market capitalisation floated on public exchanges, the free float adjustment serves to ensure the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. The index is reviewed four times a year. The currency hedged version of the index uses rolling one-month forward contracts to hedge the Yen exposure back to Euros. The hedge ratio is set at 100% (fully hedged) at the beginning of each month, and is not adjusted until the beginning of the next month. As of writing, the index is biased towards financials (22% of the index’s value), closely followed by consumer discretionary (21%) and industrials (20%).

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The iShares MSCI Japan Monthly EUR Hedged uses physical replication to track its reference index. The ETF invests in all equities of the index. iShares may engage in securities lending within this fund to generate additional revenues for the fund. The lending revenues generated from this activity are split 60/40 between the fund and the lending agent BlackRock, whereby BlackRock covers the costs involved. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary from 102.5% to 112% of the value of securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower would fail to return. The indemnification arrangement is subject to changes, and in some cases without notice. Finally, BackRock limits the amount of assets that can be lent out by this ETF at 50%.Cash received as dividends from the underlying stocks is held in the fund’s income account until it is distributed to fund holders. Distributions are made on a quarterly basis. This dividend treatment can potentially create a drag on returns in upward trending markets as dividends are not reinvested into the fund. In practice this cuts both ways. It could also result in outperformance if the benchmark falls in the interim period.

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The fund levies a total expense ratio of 0.64%, the most expensive ETF tracking Japanese equities. This compares to a TER for the firm’s unhedged MSCI Japan ETF of 0.59%. Other potential costs associated with holding this fund which are not included in the TER include rebalancing costs, bid-ask spreads and brokerage fees.

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As of writing, there are many ETFs offering exposure to Japanese equities. However, only RBS offers a similar EUR-hedged exposure. The RBS Market Access TOPIX EUR Hedged ETF uses synthetic replication and levies a TER of 0.50%. Amongst the crop of non-hedged ETFs, the largest alternative in terms of total assets under management is the iShares MSCI Japan Inc. This ETF also uses optimised sampling and levies a total expense ratio of 0.59%. Investors preferring the Nikkei 225 Index as reference index for Japanese stocks can invest in the ComStage ETF Nikkei 225. The fund uses synthetic replication and levies a total expense ratio of 0.45%.

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Über den Autor

Gordon Rose, CIIA, CAIA,

Gordon Rose, CIIA, CAIA,  war von 2011 bis 2014 Fondsanalyst bei Morningstar.