Ruth Saldanha: Despite the threat of a possible trade war with China and the U.S., many investors are bullish on the country and other Asian markets as well. The Morningstar Japan Index is up over 13% since last year while the S&P/TSX Composite is up around 7.25%. Is there more potential upside in Asian markets? With me to discuss this is Jeff Weniger, WisdomTree Asset Allocation Strategist. Jeff, thank you so much for joining us.
Jeff Weniger: Thanks, Ruth.
Saldanha: To start off with, let's talk about China. With this whole trade dispute on the cards, what is your outlook on the country as a whole?
Weniger: Well, one of the things that we've been seeing over at WisdomTree is that there's a few things going on with respect to the trade war. Here we are in the latter part of '18 at this point and if the trade war is something that should surprise us, we've been pricing it in as a market since Trump was on the campaign trail back in '16. It's kind of like back in the Greek crisis days where eventually the market stops caring after a little while. And so, we have at this point about half of the total burden of Chinese exports and on the table tax declaration by the Trump administration, the first $50 billion and then subsequent $200 billion and so forth. But we are kind of getting to the point now as a market where at what point would it even be a surprise if you put a tariff on all $466 billion of Chinese exports to the U.S. So, it's a potential, kind of, wash away situation where even if it gets announced tomorrow, will any of us do anything more than just yawn?
Saldanha: So, you are happy with it? You don't think that there's any major negatives on the way as far as that is concerned?
Weniger: Well, I mean, certainly, there's negatives and it goes beyond just China, the NAFTA negotiations, even the U.S. having tips with Angela Merkel in Germany and these concepts. But even if you do the math on how much Chinese commerce maybe touched, Chinese economy is $12.2 trillion. $466 billion exported to the United States. Lop off $100 billion or $200 billion for all we care. The reality is, is that the fiscal stimulus that we are going to be seeing from the Chinese is probably enough to more than Trump, anything that we're seeing that's deleterious on the trade side.
Saldanha: Okay. Now, let's move to Japan. What would you like about that market at the moment? Why are you so optimistic and upbeat about that particular market right now?
Weniger: Yeah. Japan, the permanently neglected third-largest economy in the world. There's valuation case to be made. We have come as a society from the point where we are now two generations ago when if we were having this conversation, I would have been playing tee-ball back in 1990. I mean, I was 9-years-old at that time when Japan peaked out and it was the most expensive market in the world. And now, you've had this situation where we've had essentially three decades to rectify these valuations. Nobody is launching Japan ETFs except for us. You're looking at a market that's at 12 times earnings and yet Japanese JGBs across the yield curve yield zero. So, there's a nice little fed model play to take Japanese earnings yields north of 8, compare it to zero on the bond yields and say, maybe there's a valuation case to be made on the equity side.
Saldanha: Just last month WisdomTree launched two ETFs, one in China, one in Japan. Tell us more about these funds and what kind of investors are you targeting through them?
Weniger: Yeah, absolutely. With the China one, it's the S&P 500 of China. So, we think that right there we're going to have critical name recognition right there. Standard & Poor's is putting their name behind the S&P 500 for China, cap-weighted China. Something that's interesting about cap-weighted China in the 500 structure is that in the trade wars if people have more pessimistic view of the trade wars than me – remember that the state-owned enterprises themselves that tend to populate in index like that are not necessarily the ones that are going to be exporting to the United States or other partners. And so, they tend to be much more insular and so you might not get hit so much on the Chinese banks, which by the way, their valuations have collapsed because China has been kind of a rough – not only in '18 but it really peaked out about three years ago. And on the Japanese side, we have a history currency hedging within ETF structure and so with the Japanese equities. But you can opt to take the ETF that's not hedged or the one that's hedged back to CAD. And so, we think this is an opportunity to really expand out the suite that we have on the TSX where it's not solely European or solely U.S. or Canadian equities, but now we have Japan and dedicated China as well.
Saldanha: Thank you so much for joining us today, Jeff.
Weniger: Great, Ruth. Thank you. I appreciate it.
Saldanha: For Morningstar.ca, I'm Ruth Saldanha.
