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This article raised the hairs on the back of my neck. It blows away my thoughts that this downturn is short term. The source does make sense but I want to share and see what the MFO community has to say.
On a lighter note ;-), with the Yen falling so much against the dollar, and excess capacity in China, does this spell trouble for a fund like MAPIX where 26% of its portfolio is invested in Japan and 25% in China/Hong Kong and MACSX with 28% in China/Hong Kong?
Don't confuse the currency with the companies. The article points this out in a short one liner:
"Where should investors now take shelter as Japan’s monetary expansion threatens to send the world crashing down around us? Ironically, the answer Edwards is giving clients is Japan itself.
“Japan is a place where we can find quite a lot of cheap, deep-value stocks at the moment,” he said. “Just hedge out the currency.”
I take this to mean...don't hold these equities in local currencies. Hopefully fund managers are smart enough to "hedge out the currency".
Bloomberg TV had a small segment regarding the Japanese automakers today. Due to the new tax, they are slowing production in Japan and increasing production overseas.
If this is happening in the other sectors that sounds a bit ominous for the Japan markets.
@Mona, Yes I think those Matthews funds would be affected. For how long? That would require a crystal ball. I don't have one. If Abe's schemes don't work, he will be out in short order and Japan would have a new prime minister, the umpteenth one in so many years.
@bee, I think you're exactly right! Easy monetary policy in Japan and a weaker currency will help stocks there just like it has sent stocks on a great ride for the last 5+ years in the U.S. I don't buy the idea that the U.S. is at risk of sliding into deflation although Europe is having more difficulty with that.
@Mona, I don't see anything on Matthews site or M* that suggests they've hedged currency exposure for MAPIX (I didn't check MACSX). I also believe the tax that's coming into effect in Japan in another month or two will hurt the economic numbers at the end of this year and into next year, which will either mean the BOJ will have to further ease to help the economy (sending the currency lower) or the currency will fall because the economy is worse.
I'm going to write a note to Matthews about currency hedging and I'll post whatever answer I get here but my experience with them has been that it takes a day or two for them to answer my emails.
WisdomTree has a suite of hedged Japan etf's if that's of interest ... DXJ is the broad-based one.
The Matthews prospectus boilerplate language (for each of its stock funds, under "Principal Investment Risks") says this:
'While the Fund is permitted to hedge currency risks, Matthews does not anticipate doing so at this time.'
The separate prospectus for MAINX says this (under "Principal Investment Strategies"):
'The Fund will not seek to limit its foreign currency exposure and may invest without limitation in non-U.S. dollar-denominated securities and instruments. The Fund reserves the right to hedge its exposure to foreign currencies to reduce the risk of loss from fluctuations in currency exchange rates, but normally does not expect to do so.'
MAINX does invest in U.S. dollar-denominated Asian debt, however - the split has been roughly half U.S. dollar, half foreign lately.
Thanks @AndyJ, its good to know about WisdomTree and your comments about Matthews made me go back and look. MAPIX has a bit less than 8% of its portfolio as of June 30 in USD denominated investments. That doesn't seem to be any of its Japanese holdings but rather mostly Chinese/Taiwanese stocks.
Well 5 days with no answer from Matthews. I find that disappointing because even if they weren't willing to tell me whether they had an thoughts about hedging currency they could have at least just written and said so. Maybe the turmoil in Hong Kong delayed things and I'll get an answer in the next few days, but I'm not holding my breath.
And just like magic, I received a reply today!! In simple terms they said they don't expect to be hedging currencies. The details were valuable I think, on the one hand currencies don't have a clear correlation to the stock market so hedging effectively isn't always easy. I think this is nonsense, because the point isn't for the currency to be correlated to the stock market, it's to remove currency from the return equation for better or worse, and that can be done very easily.
They also said that hedging in smaller markets can be quite expensive, and... that they consider things like whether their investments would benefit or be hurt by strong/weak currencies so essentially their decisions incorporate an assumption that they're not going to hedge (those are my words for what they said). They did say they are monitoring the yen, but it seems from the rest of what they said that the monitoring is more likely to impact what they invest in or whether they continue to hold an investment rather than whether they would hedge or not.
Comments
Thanks for the read.
On a lighter note ;-), with the Yen falling so much against the dollar, and excess capacity in China, does this spell trouble for a fund like MAPIX where 26% of its portfolio is invested in Japan and 25% in China/Hong Kong and MACSX with 28% in China/Hong Kong?
Mona
"Where should investors now take shelter as Japan’s monetary expansion threatens to send the world crashing down around us? Ironically, the answer Edwards is giving clients is Japan itself.
“Japan is a place where we can find quite a lot of cheap, deep-value stocks at the moment,” he said. “Just hedge out the currency.”
I take this to mean...don't hold these equities in local currencies. Hopefully fund managers are smart enough to "hedge out the currency".
If this is happening in the other sectors that sounds a bit ominous for the Japan markets.
@Mona, Yes I think those Matthews funds would be affected. For how long? That would require a crystal ball. I don't have one. If Abe's schemes don't work, he will be out in short order and Japan would have a new prime minister, the umpteenth one in so many years.
@Mona, I don't see anything on Matthews site or M* that suggests they've hedged currency exposure for MAPIX (I didn't check MACSX). I also believe the tax that's coming into effect in Japan in another month or two will hurt the economic numbers at the end of this year and into next year, which will either mean the BOJ will have to further ease to help the economy (sending the currency lower) or the currency will fall because the economy is worse.
I'm going to write a note to Matthews about currency hedging and I'll post whatever answer I get here but my experience with them has been that it takes a day or two for them to answer my emails.
The Matthews prospectus boilerplate language (for each of its stock funds, under "Principal Investment Risks") says this:
'While the Fund is permitted to hedge currency risks, Matthews does not anticipate doing so at this time.'
The separate prospectus for MAINX says this (under "Principal Investment Strategies"):
'The Fund will not seek to limit its foreign currency exposure and may invest without limitation in non-U.S. dollar-denominated securities and instruments. The Fund reserves the right to hedge its exposure to foreign currencies to reduce the risk of loss from fluctuations in currency exchange rates, but normally does not expect to do so.'
MAINX does invest in U.S. dollar-denominated Asian debt, however - the split has been roughly half U.S. dollar, half foreign lately.
They also said that hedging in smaller markets can be quite expensive, and... that they consider things like whether their investments would benefit or be hurt by strong/weak currencies so essentially their decisions incorporate an assumption that they're not going to hedge (those are my words for what they said). They did say they are monitoring the yen, but it seems from the rest of what they said that the monitoring is more likely to impact what they invest in or whether they continue to hold an investment rather than whether they would hedge or not.
You are a demanding taskmaster, LLJB.
Sa-lu-tay!