Abe Restores Investors' Faith in Uranium ETFs
A month ago, Shinzo Abe was successful in his quest for a second chance to be Japan’s prime minister (he previously held the premiership, but resigned due to health reasons). The tough-talking Abe has been a boon for investors in an array of Japan-focused ETFs, ranging from the iShares MSCI Japan Index Fund (NYSE: EWJ) to the WisdomTree Japan Hedged Equity Fund (NYSE: DXJ) to the ProShares UltraShort Yen (NYSE: YCS).
Abe’s victory has also brought new life to uranium funds, a sub-segment of the ETF universe that was cast aside following the natural disasters that ravaged Japan in early 2011. By now, plenty of investors know the tales of woe pertaining to the Global X Uranium ETF (NYSE: URA) and the Market Vectors Uranium + Nuclear Energy ETF (NYSE: NLR).
In February 2011, URA traded above $22. By June 2011, following the horrific earthquake and tsunami that hit Japan, URA had been cut in half. URA tried to rebound, even getting back above $10 early last year, but on November 15, roughly the same time it became apparent Abe was running again, the ETF was found below $6.
NLR’s story is similar. That ETF traded above $27 in February 2011 before sliding below $15 by the end of that year. As was the case with URA, there was an early 2012 rebound. Now, NLR’s $15 print in late 2011 looks pretty good because the ETF closed at $14.65 on Tuesday.
Now, it appears as though the darkest days faced by NLR and URA are in the past. Abe’s victory has a lot to do with that. Since December 14, just days before Abe and his Liberal Democratic Party swept to victory, URA has surged 15.4 percent. NLR has added 5.6 percent.
Of course, it helps that Abe is pro-nuclear energy whereas the administration his replaced was not. If Abe approves restarting some of Japan’s nuclear reactors later this year, a massive uranium inventory overhang that has plagued spot prices of the commodity could be wiped out.
Uranium prices are forecast to range from $45 to $62.60 per ton after averaging less than $49 last year, according to a Bloomberg survey.
The bull case for NLR, URA and their constituents extends beyond Japanese politics. Since prices have plunged over the past two years, producers have scaled back production. In a perfect world for NLR and URA, reduced supply and increased demand would meet at the same time, spurring these ETFs to further upside. That scenario is possible, particularly if Japan renews its interest in nuclear energy.
It is also possible without Japan. Combined, China, India and Russia have plans for nearly nearly 130 nuclear reactors. Bangladesh, Turkey and the United Arab Emirates are among the other developing nations expecting to bring nuclear power plants online over the next several years.
Inflows to URA indicate investors are warming to the idea of a uranium renaissance. According to data provided to Benzinga by Global X, URA’s issuer, the ETF had $120 million in assets under management on December 13. That number popped to $129 million on December 17, the day after Abe’s victory. As of January 15, the ETF had over $146.7 million in AUM.
The near- to medium-term outlooks for uranium equities and ETFs such as NLR and URA still revolve around the aforementioned factors of Japan and rising prices. Should both scenarios work out favorably, URA trading with a price-to-book ratio of just 0.69 could be a steal.
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