• Lion Global Investors have listed a fifth ETF for trading on SGX, taking the combined AUM of the five ETFs to S$812 million. The newest ETF has been launched in conjunction with Nomura Asset Management, and with a current AUM of S$48 million, is the first Active ETF to list on SGX.
   
• The ETF currently aims to capture the upside potential of both Japanese stocks and the yen currency, using a combination of advanced AI and machine-learning techniques to select TOPIX constituents based on  various factors, such as fundamentals, technicals, quality and value.
   
• Following its strong economic performance in 1H23, Japan has taken much spotlight going into 2024. Its 4Q23 is GDP due 15 Feb, and is expected to return to QoQ growth. The BOJ may also end its NIRP and YCC in 2024 if CPI stays above 2% on the back of the wage negotiations for FY25 (beginning 1 April) completed at comparable or higher increases than FY24.
   

A new Active ETF has made its debut on SGX, thanks to a collaboration between Lion Global Investors and Nomura Asset Management. The ETF, which has a current AUM of S$48 million, is the first of its kind to be listed on SGX, and joins four other ETFs managed by Lion Global Investors. The five ETFs have a combined AUM of S$812 million, reflecting the growing demand for diversified and cost-effective investment fund solutions in recent years.

Singapore ETFs managed by Lion Global

Source: SGX, Bloomberg (Data as of 2 February 2024)

Singapore investors looking to gain long exposure to both the TOPIX and yen, can do so through the Lion-Nomura Japan Active ETF which listed for trading on 31 January.  The ETF debuted with S$37 million of AUM, which has notched up to S$48 million as of the 2 February close.

As Singapore's first AI-powered ETF, the fund employs a variety of AI and Machine Learning based techniques to conduct investment analysis, whilst utilising fundamental, technical, qualitative, quantitative and other relevant datasets. In its first week of trading, the Lion-Nomura Japan Active ETF has:

• Applied the investment analysis and datasets to the top 1,000 of the most traded stocks listed on the Tokyo Stock Exchange and the Nagoya Exchange; and
• Selected 50 to 100 equity securities for the ETF which the AI models have determined to have the strongest potential to achieve capital appreciation;
• According to the prospectus, a procedure to typically update AI Models monthly to incorporate and reflect changes in market data, financial information of the company, company filings and announcements and other news on the company and scores each stock. This is based on factors including valuation metrics (e.g. price/book ratio, price/earnings ratio) and technical factors (e.g. momentum, market price, volume) in the Investable Universe based on its potential to outperform the broader Japanese market over the middle term time horizon (e.g. 1 to 3 months).
• Selected these stocks to also comply with risk constraints imposed by LGI and Nomura Asset Management Singapore;
• Monthly rebalances the Portfolio Holdings based on the Model Portfolio and the maximum turnover is expected to be 30% and
• Positioned Tokio Marine Holdings as the highest constituent weight, followed by KDDI Corporation and Nippon Steel Corporation at the time of the ETF’s debut;
• A management fee of 0.7% per annum of the NAV of the Fund.

Tokio Marine Holdings maintains it has achieved a 10-year CAGR of 12% in EPS growth from 2012 to 2022, ranking the stock in the “world’s top-class” for EPS growth. It attributes this to strong organic growth in addition to a robust, globally diversified underwriting portfolio and strong investment income leveraging its liability characteristics. The Group has added that the ongoing sale of business-related equities also contributes to profit. From the end of 2022, through to 2 Feb 2024, the price gains of Tokio Marine Holdings at 34.3% share price gains paralleled that of the TOPIX, with dividends boosting the total return to 39.3%. In SGD terms, the price gain was 18.8% with the total return at 23.3%.

While Japan equities have outpaced the region since the end of 2022, the yen depreciation has partially offset some of those returns. The fact that the Singapore Dollar has depreciated around 10% less to the US Dollar than the Japanese yen to the US Dollar since the end of 2022, provides more potential risk-to-return latitudes for investors seeking exposure in the Japan equities market. Thus, to some Singapore investors, this ETF may be a play on the Japanese yen as much as it is Japan equities. This is because the base currency of the Fund is the Japanese Yen, while the ETF can be traded in a Singapore Dollar denominated counter [JJJ] as well as a US-denominated counter [JUS]. The TOPIX index, which tracks all the companies listed on the First Section of Tokyo Stock Exchange, has gained 18% in Singapore dollar terms in 2023 and is now close to its historical peak of 2,886.5 points reached in December 1989. However, for investors in Singapore, the exchange rate between the Japanese yen and the Singapore dollar also. In December 1989, one Singapore dollar could buy 80 yen, but now it can buy 110 yen. This means that the Japanese market has to rise even more in yen terms to match its previous high in Singapore dollar terms.

Japan’s Economic Outlook for 2024

The potential for the Bank of Japan (BOJ) to exit its negative interest rate policy (NIRP) and yield curve control (YCC) in 2024 has taken much of the spotlight for regional investors. The BOJ stated on 23 January it will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (CPI all items less fresh food) exceeds 2% and stays above the target in a stable manner. Japan’s CPI (all items less food) has been above 2.0% since April 2022, however last year declined, from 4.2% in January to 2.3% in December 2023. If the annual wage negotiations for FY25 (beginning 1 April) produce comparable or higher wage-increases to FY24, this will be seen by the market as a potential driver for the CPI to stay above target, thus potentially prompting the BOJ to exit NIRP and/or further tweak the YCC. At the 23 January press conference,  BOJ Governor Ueda also relayed that the prospects of higher wages are gradually affecting sales prices, which is leading to a gradual increase in service prices. Back in April 2023, BOJ Governor Ueda also announced a “broad perspective” review of monetary easing measures over the past 25 years, with the review expected to last for 12 to 18 months.

On the growth front, the Regional Economic Outlook published by the IMF on 31 January, expected Japan's growth is projected to stay above its potential, but to decelerate from 1.9% in 2023 to 0.9% in 2024. This was attributed to factors that boosted growth in 2023, such as a weaker yen, robust tourism, and a rebound in business investment are expected to subside somewhat. A recent Reuters Poll also indicated that Japan's economy likely returned to quarter-on-quarter growth in 4Q23, supported by a modest improvement in external demand, however domestic consumption remains weak. Japan’s preliminary 4Q23 GDP print is due 15 February, and as relayed by Reuters, coincides with the BOJ currently considering the possibility of a near-term exit from its massive stimulus programme, while it also pays close attention to the upcoming wage negotiations and consumer spending. Nomura Asset Management expects the BOJ to alter its policy in the 2H24 and that policy decisions will be influenced not only by wage and price trends in Japan, but also by political situations and trends in overseas economies.

Both Japan equities and the Japan yen remain highly responsive to policy conjecture from BOJ Governor Ueda and Deputy Governors Uchida and Himino. The Japanese stock market also been outperformed other Asian markets in the first month of 2024, continuing its strong performance from last year.

Did you know Active ETFs Maintain Indicative NAV (iNAV) requirements?

Back in Dec, SGX released a Practice Note for the listing of actively managed exchange traded funds, defining an active ETF as one “in which the investment manager makes investment decisions on the portfolio of the ETF without being subject to the set rules of an index”.

The Practice Note 4.3 includes key guidance measures framed to promote transparency, which firstly includes a requirement for the daily disclosure of NAV, which is the same for  passive ETFs. In addition, an Active ETF issuer should provide disclosures of Indicative NAV (iNAV), as well as provide monthly disclosure of portfolio holdings and fund performance.

The active ETF shall publish, on its website, the iNAV per share or per unit at least every 15 seconds during trading hours on the Exchange, while ensuring that, as far as practicable, that the iNAV provides an accurate indication of the Active ETF’s NAV.  For the monthly disclosure of portfolio holdings and fund performance requirement, this is a higher regularity than the requirements for unlisted unit trusts.

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