Of all the global markets, Japan is the closest to a “classical bear market trough”, as Morgan Stanley’s Teun Draaisma puts it. Its p/e is well below the long-term average and it also has the lowest price/book ratio of the major markets, at 1.5 times. Better yet, it is the one world market poised to benefit from the one thing that is wreaking havoc everywhere else – inflation.
Japan “benefits totally” from the return of rising prices, says Christopher Wood of CLSA. Why? Inflation changes expectations. For years, the Japanese have behaved as though prices could only fall, and have refused to borrow money. After all, deflation makes your debt rise in real terms, so why buy now if you know prices will be lower in a year’s time? But with core inflation at its highest for ten years, it’s starting to make sense for Japanese consumers to borrow money to buy goods right now. And after more than a decade of misery, Japanese banks, unlike their Western peers, have the money available to lend. The simplest and cheapest way into the market is via an exchange-traded fund (ETF), such as the broad exposure (350 stocks) iShares MSCI Japan Index Fund (US:EWJ).
Alternatively, if you are feeling brave, you could take a bet on stock markets heading south by shorting them. Shorting is selling an asset you don’t own in the hope of buying back in again later at a lower price. The cheapest and easiest way to short the FTSE 100 is to place a ‘down’ bet with a spreadbetting firm like Igindex.co.uk, at a fixed amount per ‘point’. However, this is risky – if the market starts moving against you, you can end up losing more than your original stake, so always take out a guaranteed stop-loss.
For those less keen on the idea of spreadbetting, the good news is that you can now buy short ETFs instead. A short ETF rises when its benchmark index falls; on the other hand, if the market rises, you will lose money. Fund management group ProShares offers short ETFs in both basic (short), and leveraged (ultra) varieties, on various US indices and sectors, including the Nasdaq, Dow Jones and the S&P 500. ProShares also offers ETFs that short some international markets, including China and the MSCI emerging markets index, though not, at present, the UK. You can find out more at www.proshares.com.