Bridgewater says sell-off in Japan’s stocks is overdone

By Carolina Mandl

NEW YORK (Reuters) – Bridgewater Associates said in a commentary sent to investors on Tuesday that it believes the sell-off in Japan’s equities the previous day was exaggerated and that the stocks remain somewhat attractive, according to two sources familiar with the letter.

According to the sources, the $112.5 billion global macro hedge fund wrote that, in their opinion, the sell-off looked overdone relative to the change in fundamental conditions.

Bridgewater did not immediately respond to a request for comment on the analysis shared with investors.

On Monday, the sank 12.4% in its biggest daily sell-off since the 1987 Black Monday crash, after a job data report on Friday showed a higher-than-expected U.S. unemployment rate, raising concerns about a recession in the world’s largest economy.

On Tuesday, Japan’s benchmark index rebounded strongly and closed up 10.2%.

Investors also started to unwind yen-funded trades that had been used to finance the acquisition of stocks for years after a surprise Bank of Japan rate hike last week, exacerbating market moves.

Bridgewater said in the commentary it considered Monday’s brutal sell-off to be shallow and short-lived, not representing major changes in fundamental conditions.

A stronger yen after the Bank of Japan raised interest rates last week and a lower rate of growth in developed markets make conditions for Japan’s stocks less supportive, but Bridgewater said the unwind of the yen carry trade exacerbated the move.

The hedge fund told its investors that it continues to view Japanese equities as somewhat attractive.

Bridgewater did not disclose if it was actively involved in the yen carry trade.

MACRO FUNDS

Global macro hedge funds such as Bridgewater trade across equities, fixed income and commodities in different geographies, betting on global trends.

This strategy along with managed futures funds or commodity trading advisers (CTAs) was a strategy most affected by the recent unexpected rally in the yen, according to hedge fund research firm PivotalPath, as the funds had sizeable bets against the Japanese currencies.

In the Aug. 1 to Aug. 5 period, global macro quantitative funds posted losses between 1.5% and 2.5% because of their short yen positions, PivotalPath’s exposure model calculations showed. After losses of over 2% in July, those funds are down between 4% and 5% year-to-date, after posting gains of almost 8% in April.

The drawdown will make a recovery before the year-end more challenging for those funds, according to Jon Caplis, chief executive officer at PivotalPath.

“A lot of global macro managers going into this year were pounding the table that these (market) dislocations would be very beneficial to them and they would be able to take advantage of these opportunities. Unfortunately, I think you’re going to see some disappointment,” he said.