Emerging Asia, Japan ETFs And The Correlation Myth
Benzinga | Apr 23, 2013 01:10AM ET
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 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 (THD), 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 (EPHE) 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 of some.
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 demand.
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.
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