As Japanese Prime Minister Shinzo Abe and Bank of Japan
Governor Haruhiko Kuroda have moved to employ an ultra-loose
monetary policy that would make even Federal Reserve Chairman Ben
Bernanke blush, chatter has increased that Japan's easing efforts
will fuel a bubble in emerging markets.
The fear is that the some of the capital that is leaving Japan
must find its way to emerging markets as Japanese investors
search for higher returns.
From there, speculation has intensified that emerging markets
will "overheat" causing a bubble that inevitably burst. Emerging
Asian nations make for logical destinations for Japanese
investors and that would appear to validate bubble concerns...if
some of these equity markets actually had intimate correlations
to Japanese stocks.
When considering the evidence, arguably what is overheated is
the talk about an emerging markets bubble at the hands of Japan's
loose monetary policy. At least when it comes to select
developing markets in Asia.
Consider this: Most
mathematicians would agree
that two variables are "very highly correlated" when the
correlation ranges from 0.9 to 1. A range of 0.7 to 0.9 would be
considered "highly correlated" while 0.5 to 0.7 would imply a
moderate correlation. Drop below 0.5 and correlations can be
And that is basically what the correlations are over the past
six months for Indonesia, Philippine and Thai equities to their
Japanese counterparts: Low. The six-month time frame is relevant
for several reasons. First, it was just over six months that Abe
announced his candidacy for prime minister. Second, the time
period includes Abe's victory and Kuroda's nomination and
approval as the new BOJ governor. Bottom line: There have been
plenty of catalysts since November 2012 to explain why the yen
has been among the worst-performing developed market currencies
Start with the Market Vectors Indonesia ETF (NYSE:
). In what has been a rough year for the largest emerging markets
, such as those that track the BRIC nations, IDX has impressed
with a gain of 10.5 percent.
Over the past six months, IDX has an average correlation of
just 0.35 to the iShares MSCI Japan Index Fund (NYSE:
) and the WisdomTree Japan Hedged Equity Fund (NYSE:
).To be fair, the UN lists Japan as
Indonesia's third-largest trading partner
. That may imply some level of bubble potential for Indonesian
equity and ETFs as Japans wages war on its own currency. However,
the reality is domestic demand, not exports is
is the primary driver of Indonesian GDP
Thailand could be a potential bubble in waiting because Japan
is the country's second-largest trading partner behind the U.S.
Thailand actually has a
trade deficit with Japan
. The rising baht/falling yen scenario could stoke bubble
concerns as well.
Still, Thai equities, at least as measured by the iShares MSCI
Thailand Capped Investable Market Index Fund (NYSE:
), are not intimately correlated to Japanese stocks. THD's
correlation to DXJ and EWJ
over the past six months is 0.42
The continued ascent by the iShares MSCI Philippines
Investable Market Index Fund (NYSE:
) and Philippine stocks has also fueled some bubble talk. The
Philippine Stock Exchange Index jumped above the 7,100 level for
the first time Monday and stocks there have been in rally mode
since late 2011, long enough to warrant bubble talk in the eyes
Then again, there are significant issues with saying EPHE and
its holdings are bubbles waiting to burst. For example, the
Philippines has consistently delivered the goods
in terms of economic growth in the past year
. While the largest emerging markets such as China and Brazil
have disappointed regarding GDP growth, the Philippines has
consistently surprised to the upside.
The Philippines finally land an investment-grade
credit rating in late March
. Critics may say that will only hasten inflows to the market,
elevating bubble concerns in the process. Time will tell if that
prediction proves accurate, but the reality is EPHE and
Philippine stocks were surging well before the yen started
falling and Abe was elected.
To be sure, Japan is a prime destination for Philippine
concerns and that would be more of a concern if the Philippines
did not share something in common with Indonesia, that being an
economy that is primarily driven by domestic
Bottom line: EPHE's six-month correlations to DXJ and EWJ is
0.29. That is to say it might be wise to look for Japan-induced
bubbles in other emerging markets.
For more on ETFs, click
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