DBJP: Currency Tailwinds Receding And Valuations Normalizing (Ratings Downgrade)

seekingalpha05-29

bankrx/iStock via Getty Images A year ago, I wrote a bullish article on the Xtrackers MSCI Japan Hedged Equity ETF (NYSEARCA:DBJP), suggesting investors accumulate Japanese equities on any pullbacks ...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nDBJP: Currency Tailwinds Receding And Valuations Normalizing (Ratings Downgrade)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-29 02:28 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4696059-dbjp-currency-tailwinds-receding-and-valuations-normalizing><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>bankrx/iStock via Getty Images A year ago, I wrote a bullish article on the Xtrackers MSCI Japan Hedged Equity ETF (NYSEARCA:DBJP), suggesting investors accumulate Japanese equities on any pullbacks ...</p>\n\n<a href=\"https://seekingalpha.com/article/4696059-dbjp-currency-tailwinds-receding-and-valuations-normalizing\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4581","symbol_name":"高盛持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4696059-dbjp-currency-tailwinds-receding-and-valuations-normalizing","article_id":"2439091581","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/941846640/image_941846640.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2439091581","pubTimestamp":1716920900,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"As I detailed in my prior article, the Japanese Yen is fundamentally weak due to the Mundell-Fleming trilemma, as Japanese policymakers have kept Japanese interest rates at the zero bound while allowing the free flow of capital. Therefore, the Yen had to weaken to balance the system .   Figure 6 - Illustrative Mundell-Fleming Trilemma","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4581":"高盛持仓","BK4504":"桥水持仓","HEWJ":"日本ETF汇率对冲-iShares","SSO":"两倍做多标普500ETF","FLJH":"Franklin FTSE Japan Hedged ETF","SH":"标普500反向ETF","SPXU":"三倍做空标普500ETF","UPRO":"三倍做多标普500ETF","OEX":"标普100","SPY":"标普500ETF",".SPX":"S&P 500 Index","OEF":"标普100指数ETF-iShares","BK4534":"瑞士信贷持仓","BK4585":"ETF&股票定投概念","VOO":"Vanguard标普500ETF","IVV":"标普500指数ETF","DXJ":"日本股利指数ETF-WisdomTree","FDN":"First Trust Dow Jones Internet I","BK4559":"巴菲特持仓","BK4588":"碎股","BK4550":"红杉资本持仓","SDS":"两倍做空标普500ETF","DBJP":"Xtrackers MSCI Japan Hedged Equity ETF"},"translate_title":"DBJP：货币顺风退去，估值正常化（评级下调）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"DBJP":1,"DXJ":1,"FLJH":1,"HEWJ":1,"VOO":0.9,"SPY":0.9,"FDN":0.9,"USDJPY.FOREX":0.75,"ESmain":0.6,"UPRO":0.6,"SSO":0.6,"SPXU":0.6,"SH":0.6,"SDS":0.6,"OEX":0.6,"OEF":0.6,"IVV":0.6,".SPX":0.6},"content_text":"bankrx/iStock via Getty Images A year ago, I wrote a bullish article on the Xtrackers MSCI Japan Hedged Equity ETF (NYSEARCA:DBJP), suggesting investors accumulate Japanese equities on any pullbacks as the country's stocks were cheap compared to the rest of the world. So far, my recommendation has proved correct, as the DBJP ETF has outperformed the mighty S&P 500 Index, returning 37% compared to the S&P 500's 26% (Figure 1).   Figure 1 - DBJP has outperformed the S&P 500 Index (Seeking Alpha) However, after a further 37% rally, we should review the fundamentals of the Japanese stock markets to see if the DBJP ETF remains a buy. With the BOJ now focused on preventing additional currency weakness, the depreciating Yen tailwind that has turbocharged DBJP returns may recede in the coming months. Furthermore, Japanese equity valuations are now more normalized, so further gains may be harder to come by. I believe a period of consolidation is in order, so I am downgrading DBJP to a hold. Brief Fund Overview The Xtrackers MSCI Japan Hedged Equity ETF is one of a handful of currency-hedged ETFs focusing on Japanese equities (Figure 2). In addition to DBJP, the major currency-hedged Japanese ETFs are the WisdomTree Japan Hedged Equity Fund ETF (DXJ), the iShare Currency Hedged MSCI Japan ETF (HEWJ), and the Franklin FSE Japan Hedged ETF (FLJH).   Figure 2 - DBJP vs. peer hedged JPY funds (Seeking Alpha) The DBJP ETF fully replicates the underlying MSCI Japan Index while using derivative contracts to hedge the fund's currency exposure for US Dollar-based investors. The DBJP ETF has grown to $423 million in assets while charging a 0.47% expense ratio. Weak Currency + Strong Stocks A Powerful Combo For the DBJP ETF, returns in the past year have been driven by strong returns in the MSCI Japan Index in local currency (Japanese Yen) terms and a plummeting Yen against the US Dollar. For example, the Nikkei 225 Index, a proxy for the MSCI Japan Index tracked by the DBJP ETF, returned 24.7% in the past year, nearly equal to the S&P 500 Index (Figure 3).   Figure 3 - Nikkei 225 Index vs. S&P 500 Index in past year (Seeking Alpha) Furthermore, the Japanese Yen weakened by 11.7% against the US Dollar in the past year (Figure 4).   Figure 4 - JPY/USD weakened by 11.7% in the past year (Seeking Alpha) Since the DBJP ETF shorts the Yen against the US Dollar to hedge away the currency impact for American investors, this translates into an additional 11.7% tailwind to the fund's local currency returns (Figure 5).   Figure 5 - DBJP hedges away currency risk for American investors (etf.dws.com) When Will Yen Weakness Come To An End? As I detailed in my prior article, the Japanese Yen is fundamentally weak due to the Mundell-Fleming trilemma, as Japanese policymakers have kept Japanese interest rates at the zero bound while allowing the free flow of capital. Therefore, the Yen had to weaken to balance the system (Figure 6).   Figure 6 - Illustrative Mundell-Fleming Trilemma (investopedia) In fact, although the U.S. Federal Reserve had begun raising interest rates in March 2022, its Japanese counterpart, the Bank of Japan (\"BOJ\"), had only recently moved off of negative policy rates in March 2024 (Figure 7).   Figure 7 - US Fed Funds vs BOJ policy rates (tradingeconomics.com) Therefore, the Yen has collapsed in the past year, from ~140 JPY/USD when I wrote my last article in May 2023 to a recent low of 160 JPY/USD (Figure 8).   Figure 8 - JPY/USD has collapsed to a low of 160 JPY/USD (stockcharts.com) In recent weeks, we have finally seen Japanese central bankers intervene in the currency markets, as they were rumored to have defended the key psychological 160 JPY/USD level on May 2nd with possibly more than $23 billion in cash. Going forward, I believe the 160 JPY/USD level is a key 'line in the sand' for Japanese policymakers as they try to reintroduce two-way volatility to the currency markets that have been on a one-way depreciation freight train for the past few years. With a weaker Yen harder to come by, I believe the depreciating Yen tailwind for the DJBP ETF will turn neutral and may even turn into a headwind in the coming months. Japanese Markets No Longer 'Cheap' On Absolute Basis The other key driver behind my bullish stance on Japanese equities a year ago was because of their valuations. On a forward basis, the MSCI Japan Index was trading at a Fwd P/E ratio of 13.4x, compared to 16.5x for the MSCI World Index and 18.4x for the S&P 500 in April 2023 (Figure 9).   Figure 9 - MSCI Japan valuations, April 2023 (msci.com) Today, the same index valuations have risen to 15.5x Fwd P/E for MSCI Japan, 17.9x for MSCI World, and 21.5x for the S&P 500 Index (Figure 10).   Figure 10 - MSCI Japan valuations, April 2024 (msci.com) While the MSCI Japan Index is still 'cheaper' than the MSCI World Index and the S&P 500 Index, it is no longer cheap on an absolute basis. Historically, 15.5x Fwd P/E for MSCI Japan is towards the high end of its range since Great Financial Crisis (Figure 11).   Figure 11 - Historical Fwd P/E suggests MSCI Japan is no longer 'cheap' (yardeni.com) Technicals Suggest A Period Of Consolidation Technically, the Nikkei Index recently surpassed its 1990 highs and pushed to the psychological 40,000 level before pulling back in recent weeks (Figure 12). While the trend remains technically strong and positive, one should assume a period of consolidation is required to 'digest' the current 40k level.   Figure 12 - Nikkei has returned to 1990 peak (Author created using stockcharts.com) The index is also at the upper end of a rising uptrend since the 2008 lows, which suggests a period of consolidation is in order. For the DBJP ETF, its 2023 breakout from the ~$50 level has now completed a 'measured move' of ~$25, roughly equivalent to a swift rally from the COVID-19 pandemic lows to 2021 highs (Figure 13). I would not be surprised if DBJP spends a few quarters backing and filling around the $75 level as it digests the explosive breakout move from 2023.   Figure 13 - DBJP has completed a 'measured move' (Author created with stockcharts.com) Conclusion  With the Bank of Japan now squarely focused on preventing additional Yen weakness and Japanese equity valuations more normalized compared to the rest of the world, I believe it may be time for the DBJP ETF to take a breather and spend a few quarters consolidating near the current $75 / share level. 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