Japanese equities are vulnerable to global political risks because overseas investors essentially see Japan as one of the most sensitive markets to global growth concerns and swings in sentiment, a Japan-focused fund-manager said. As Japan could take the brunt of a US rate hike and possible rising protectionism after the US presidential election, the Dutch hedge fund Pelargos Capital is focusing more on mid-cap stocks and real estate investment trusts (REITs) with less exposure to the global macro factors.
"Japan is very much exposed to sentiment of foreign investors coming in and out of the markets," Richard Dingemans, Pelargos chief executive officer, told Reuters. "Many of them don't really care about company-specific fundamentals. If the global economy is good, they buy Japan -they buy the Nikkei futures and they don't worry about anything else. Japan is just a cyclical market."
Many global investors use the Nikkei as a proxy for bets on global economy, especially at a time of crisis, because the Japanese market opens first and offers liquidity that many other markets cannot match. The day Brexit became a reality was a good example, Dingemans says. As early voting results came in, his co-manager sold the Nikkei futures heavily to protect their exposure.
Noting the need for adequate downside protection, Dingemans said Pelargos had bought out-of-the-money put options to get over the US election because "at some point, the market will start pricing in the neck-to-neck race and will become nervous about Donald Trump". Dingemans said, although there were a few large caps they like for company specific reasons, their "long book" had a lot of exposure towards mid-cap domestics and REITs, which are less exposed to global macro factors and swings in sentiment.
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