At the beginning of 2024, A-share investment opportunities are becoming more and more apparent, and the Japanese market has also attracted the attention of investors.
As an asset allocation option, cross-border ETFs have become a favored variety for investors in recent years. Looking at China, it can be said that there are currently 6 and a half funds that can invest in the Japanese stock market, Japan's Orient Stock Exchange Index ETF, E Fund Nikko Asset Management Nikkei 225 ETF, Huaxia Nomura Nikkei 225 ETF, Huaan Mitsubishi UFJ Nikkei 225 ETF and ICBC Credit Suisse Daiwa Nikkei 225 ETF, these 5 ETFs have the highest attention in the market. In addition, there is one and a half that are relatively unfamiliar to some investors, one is JPMorgan Japan Select, which is an active product, and the other half is the Asia-Pacific low-carbon ETF of China Southern Fund, whose tracking index is designed to reflect the performance of large-cap stocks and mid-cap stocks in the Asia-Pacific market.
In the current market environment, how to choose among the above products plays a decisive role in the premium rate. According to Wind data, only Japan's Topix ETF premium remained at 0 on January 17, mainly because the QDII subscription quota for this product was relatively sufficient.
The premium rate is the deciding factor
In June 2019, the first four China-Japan ETF Connect products, including Japan's Topix Index ETF, E Fund Nikkei 225 ETF, Huaxia Nomura Nikkei 225 ETF and Huaan Mitsubishi UFJ Nikkei 225 ETF, were listed on the Shanghai Stock Exchange. Subsequently, ICBC Credit Suisse Daiwa Nikkei 225 ETF was also listed on the Shenzhen Stock Exchange.
As can be seen from the name, E Fund Nikko Asset Management Nikkei 225 ETF, Huaxia Nomura Nikkei 225 ETF, Huaan Mitsubishi UFJ Nikkei 225 ETF and ICBC Credit Suisse Daiwa Nikkei 225 ETF track the Nikkei 225 Index, and Japan's Topix Index ETF tracks the Topix Index.
Source: Wind
According to the data, the Topix Index is compiled by the Tokyo Stock Exchange, based on all stocks listed on the primary market of the Tokyo Stock Exchange, with more than 2,000 constituent stocks, and is calculated according to the weighted average of the free float market capitalization.
The Nikkei 225 Index is compiled by the Nikkei Shimbun and is calculated based on the 225 most traded and liquid stocks listed on the primary market of the Tokyo Stock Exchange, using a revised arithmetic average stock price.
From the index design, it can be seen that the Topix stock price index is more representative of the overall performance of the Japanese stock market, while the Nikkei 225 can only represent the trend of blue chips.
The characteristics of the two indexes can also be seen from the market performance, the Topix stock price index and the Nikkei 225 index have shown a positive correlation in the past four years, and the yield is basically the same, but the Nikkei 225 is more elastic due to the high concentration of holdings, and the defense ability of the Topix stock price index is stronger.
From the perspective of product design, the five ETFs do not directly buy Japanese stocks, but indirectly track the index by investing in Japanese ETFs, and the upper ETFs are generally larger.
Thanks to the official cooperation, the overall fee rate is lower than that of most mainstream ETFs in China. According to the data, the management fee and custody fee of the 5 ETFs are 0.2% and 0.05%, and the ETF fee rate in Japan is more complicated to calculate, but it generally does not exceed 0.2%, and the total fee rate is roughly estimated to be around 0.4%.
From a trading point of view, the decisive factor in choosing among the five ETFs is the premium rate, because a high premium means a high risk. Cross-border ETFs need to use foreign exchange quotas to invest in foreign assets, and if the quota of the fund company is used up, the subscription can only be suspended first, which cannot flatten the intraday premium.
According to the statistics of Huabao Securities, historically, the premium rate of ETFs has not been able to maintain a high level for a long time. Since 2020, there have been a total of 47 cases where the premium rate of domestically listed ETFs has exceeded 15%, while the average number of days when it has remained above 15% is only 1.7 days. That is to say, the average is not more than 2 days, and the high premium rate will converge downward.
Among the current ETFs, only Japan's Topix ETF has a premium of 0. This is mainly because the cumulative subscription quota of the product on the day is set at 500 million shares, which is enough to iron the intraday premium.
What's going on with the premium rate?
What exactly is the premium rate? It has to do with the product design and trading model of the ETF.
ETFs have two main trading channels, one is over-the-counter trading, which uses a basket of stocks to subscribe and redeem, this price is called IOPV (Indicative Optimized Portfolio Value), which is different from ordinary funds that update their net value every day, IOPV will be updated every 15 seconds.
The other is exchange trading, which is the trading price of ETFs on an exchange, which is affected by the buying and selling sentiment of the market.
Due to the different factors influencing the OTC net value of ETFs and the on-exchange trading price, and the ETF market is generally smaller, far less stable than the linked basket of stocks, it will lead to a certain difference between the two.
When investor sentiment is too high, it can cause the ETF to trade at a rapid rally, resulting in a premium. Conversely, when investors panic, the price of the ETF falls too much, leading to a discount.
When the difference between the fund's OTC net value and the on-exchange trading price is too large, there is room for arbitrage. For example, buy a "cheap" fund with a basket of stocks on the OTC and sell it at a "high price" on the OTC.
In today's highly developed investment tools, theoretically, once there is an arbitrage opportunity in the market, it will be discovered by smart investors, and then rush to eat away the arbitrage space.
Cross-border ETFs need to use foreign exchange quotas to invest in foreign assets, and when there is room for a premium, investors can subscribe to ETFs, which is based on the price of IOPV, and then sell at a premium in the market to make profits.
However, the fund company has limited foreign exchange quota for itself, and the quota for each product is also limited, and if the quota is used up, it can only suspend the subscription first, which leads to the inability to flatten the intraday premium through arbitrage.
To give a simple and easy-to-understand example, this is like buying vegetables, market A and market B are both selling the same kind of cabbage, sometimes market A is more expensive, sometimes market B is more expensive.
Suppose that the cabbage in market A is much more expensive, and someone keenly discovers this problem, they will buy cabbage in market B and sell it in market A, then they can make the difference, which is called arbitrage.
If there are more people who find the price difference between market A and market B, then too many people will buy cabbage in market B, which will lead to price increases, and the increase in the supply of cabbage in market A will lead to a price decline, and the price of cabbage in the two markets will eventually converge, and the arbitrage space will disappear at this time.
However, due to mechanism problems, the market demand for A is very strong, and those who are qualified to buy cabbage in market B can only buy a few cabbages a day, which naturally cannot iron the premium.
Therefore, it can be seen that several fund companies have frequently made two actions in the past few days: one is to announce that there is a risk in the premium for investors, and the other is to increase the subscription limit.
According to industry insiders, the QDII quota of the relevant fund company is currently fixed, but in order to control the continued expansion of the premium, the company will allocate the QDII quota to the Nikkei ETF as much as possible.
Can the Japanese stock market still rise?
Since Warren Buffett publicly stated that he would overweight the Japanese stock market in April 2023, the rally in the Japanese stock market has continued to strengthen.
After the Nikkei 225 index achieved a nearly 30% gain last year, second only to the Nasdaq, the start of 2024 is just one step away from the all-time high of the 90s after consecutive gains.
The rise of the Japanese stock market in 2023 can be attributed to five reasons: (1) the resumption of economic activity (2) the loose monetary policy that has been maintained against the backdrop of interest rate hikes in Europe and the United States (3) the depreciation of the yen has improved the earnings expectations of exporting companies (4) the management's reaction expectations to the EPI's focus on the cost of capital and stock prices (5) the strong expectation of deflation elimination, and the fifth reason is the most important and directly drives the rise in stock prices.
So can the Japanese stock market continue to rise? What are the current risk factors?
Source: Haver, as of 15 January, CICC Research
According to CICC's forecast, the current round of gains in the Japanese stock market is basically contributed by valuation, and short-term sentiment has been relatively sufficient.
However, from the perspective of funds, passive external funds are the main force for longs, and there will still be incremental funds in the future. From the perspective of EPFR, as of January 10, the first two weeks of 2024 were dominated by passive fund inflows, of which foreign passive fund inflows were more (accounting for about 60%), but the allocation ratio of funds benchmarked by the MSCI World Index in Japan (5.3%) is still lower than Japan's weight in the index (6.1%), and there is still room to repair from the standard allocation.
What are the potential risk factors for the Japanese stock market in the future? CICC believes that the uncertainty of short-term monetary policy is the focus of the current market game. Monetary policy may not change aggressively and can be hedged after the Fed eases, which remains a "headwind" in the short term.
As the Japanese economy gradually emerges from deflation, the Bank of Japan is likely to continue to normalize monetary policy, while Japan's long-term interest rate growth will be restrained compared to the United States and Europe, and the accommodative monetary policy is expected to continue.