Quite a rally in Japan over the past six weeks. I’m happy there’s some excitement about Japanese stocks but at the same time I’m worried the hot money and sentiment will prove truly ephemeral. Institutional investors in the U.S. are mostly one-trick ponies when it comes to Japan. I discuss this in my book. Retail investors often get burned going long iShares Japan (EWJ), not exactly their fault though with the sudden swarm of Japan pundits pitching long-Japan/short-yen, all paying obligatory homage to EWJ. For the record, EWJ is not the Nikkei (N225) and though it is a convenient proxy in conversation, it is a poor one in practice.
With that being said, Japan could remain the hot trade into 2013 but it’s worth knowing what’s going on, notably with the impact of the yen. Expectations seem to be quite high (too high!?) that inflation can be created and this will somehow right Japan’s ‘doomed’ economy. I’m doubtful of manufacturing real growth with money schemes. I also don’t believe Japan’s economy is doomed. In fact my favorite stocks are mostly domestic-demand companies. Grab a copy of my book if you haven’t already. Meantime, hope you enjoy my exclusive article at Seeking Alpha: “Real numbers and thoughts behind a weak yen and Japan’s exporters.” Best wishes in 2013!
Enzio von Pfeil, the author of Trade Myths: Globalization has left trade balances behind, is a Hong Kong-based investment advisor and he also manages his own family of funds using his Economic Clock. He is a regular contributor to Bloomberg TV and CNBC Asia. Enzio earned his Ph.D. in economics at the University of Freiburg in Germany (he studied under renowned “Austrian School” economist Friedrich von Hayek), and subsequently went into banking and garnered invaluable experience in Treasuries, currencies, and macro strategies. He later served as chief regional economist for leading London-based i-banks in Hong Kong.
As someone who has followed Enzio’s work for the past several years, I can confidently say that Trade Myths is as iconoclastic as he intended it to be and with sound reason, not to mention its critical timeliness. While Trade Myths should be required reading for everyone in government (especially in the U.S.), it is also a must-read for those in the capital markets, and it is also readily accessible, and highly suggested to, everyone in the workforce. Trade Myths weighs in at a concise 75 pages, with ten pages of charts that clearly illustrate his trade myth-busting. Below I provide a synopsis of the book and conclude with some Q&A I just had with Enzio. Before starting, I want to thank Enzio for publishing Trade Myths, which has served as a real eye opener, particularly in terms of what headline trade figures mean (or that is, what they miss), how much foreigners are really financing America, and for the various scenarios provided of what could happen if trade goes wrong.Continue reading
Interesting developments in the Nikkei ahead of the parliamentary election at the end of this month, which at this point looks as if it will finally bring an end to LDP rule. A foreign exchange rate of $1/¥94 would have been practically inconceivable prior to the “Lehman shock” (as the Japanese refer to the genesis of the financial crisis), let alone a stock market rally. And now, ahead of what appears to be a DPJ (opposition party) that will let the yen appreciate and focus more on domestic demand (rightfully so), the stock indices are showing no fear of the yen.
A sustained rally in conjunction with even more yen appreciation bodes especially well for the domestic-oriented stocks, of which there are plenty — many that still have saliva-inducing valuations. However, exporters remain the headline grabbers, and it is not clear just how much yen strength can or will be tolerated (one suggestion is ¥87 is the trip wire, a level reached early this year, and a level not seen previously since the mid-90s). That being said, again what makes this all very interesting is that although the strong yen makes Japanese exports less competitive (great instead for instance, for South Korea [[EWY]], it does allow them to invest more in production overseas, a win-win for the Japanese and local FDI recipient economies.
What worries me though is the pace of reform(s) versus expectations, assuming a DPJ victory. Meantime, there is no debating the fragility of the domestic/global economy and the recovery thus far in equities. Domestic and overseas investors are very fickle and just as quickly as money has been flowing in, it can reverse course equally as quickly. The seemingly conservative, opportunistic play would be to go long the yen [[FXY]]. The DPJ’s financial advisors (and by extension, one of them possibly being tapped as finance minister) have already gone public saying they don’t intend to intervene in forex, except in extraordinary cases. Another play would be to look at the smaller-cap funds like [[DFJ]] and [[JSC]], but unfortunately, these are not very liquid and are quite fragmented. Time-permitting I will look at posting some specific stock picks.
At the time of publishing, the author does not own any long/short positions in the funds mentioned.