Bridgewater: Sell-Off in Japan’s Stocks is Overdone, According to Reuters

By Carolina Mandl

NEW YORK – Bridgewater Associates expressed in a commentary to investors that the recent sell-off in Japan’s equities was overstated and that the stocks remain relatively appealing, according to two sources familiar with the letter.

The $112.5 billion global macro hedge fund stated that, in their view, the decline appeared excessive compared to the actual changes in fundamental conditions.

The hedge fund did not reply to a request for further comment on the analysis shared with investors.

On Monday, Japan’s stock market experienced its largest drop since the 1987 Black Monday crash, plummeting 12.4% after a job report indicated a higher-than-expected U.S. unemployment rate, which intensified concerns about a recession in the world’s largest economy.

However, on Tuesday, Japan’s benchmark index made a significant recovery, closing up 10.2%.

Investors began to unwind yen-funded trades, which had supported stock acquisitions for years, following a surprise interest rate hike by the Bank of Japan last week, which further amplified market volatility.

Bridgewater described Monday’s sharp sell-off as superficial and likely temporary, arguing that it did not reflect any major shifts in fundamental conditions.

While a stronger yen post-rate hike and slower growth in developed markets create less favorable conditions for Japanese stocks, Bridgewater indicated that the unwinding of the yen carry trade intensified the market movement.

The hedge fund reaffirmed its view of Japanese equities as still being somewhat attractive.

Bridgewater did not indicate whether it was actively participating in the yen carry trade.

MACRO FUNDS

Global macro hedge funds like Bridgewater engage in trading across various asset classes, including equities, fixed income, and commodities, capitalizing on global trends.

This investment strategy, along with managed futures funds or commodity trading advisors (CTAs), was significantly impacted by the recent rally in the yen, as highlighted by hedge fund research firm PivotalPath. These funds had substantial positions against the Japanese currency.

During the period from August 1 to August 5, global macro quantitative funds recorded losses between 1.5% and 2.5% due to their short yen positions, according to PivotalPath’s exposure model. Following a decline of over 2% in July, these funds are now down between 4% and 5% for the year-to-date, after enjoying nearly 8% gains in April.

The drawdown will complicate any recovery before the year’s end, according to Jon Caplis, CEO of PivotalPath.

“A lot of global macro managers were optimistic at the start of the year, believing these market dislocations would present valuable opportunities. Unfortunately, some disappointment is likely to emerge,” he remarked.