Bridgewater: Japan's Stock Sell-off Overdone, Equities Still Attractive
Bridgewater Associates informed investors that Monday's drastic sell-off in Japan's stocks was exaggerated. The $112.5 billion global macro hedge fund believes that the significant drop did not align with fundamental economic conditions. According to sources familiar with the commentary, Bridgewater considers Japanese equities somewhat attractive despite the recent turmoil. The hedge fund did not immediately respond to requests for comments on their analysis.
On Monday, Japan's benchmark index experienced a 12.4% decline, marking the biggest one-day drop since the 1987 Black Monday crash. This sell-off followed a concerning U.S. job data report, which indicated a higher-than-expected unemployment rate, raising fears of a potential recession. However, the index rebounded strongly by 10.2% on Tuesday, indicating investor optimism.
The market volatility was further intensified by the unwinding of yen-funded trades. Investors had used these trades to finance stock acquisitions for years. The situation was exacerbated by a surprise Bank of Japan rate hike last week, which led to significant market movements.
Bridgewater highlighted that Monday's sell-off seemed shallow and short-lived, not reflecting major changes in fundamental conditions. Although a stronger yen and slower growth in developed markets present challenges for Japan's stocks, the hedge fund believes the unwind of the yen carry trade exaggerated the sell-off. Bridgewater continues to view Japanese equities as somewhat attractive.
Global macro hedge funds like Bridgewater operate across various asset classes, including equities, fixed income, and commodities, capitalizing on global trends. According to hedge fund research firm PivotalPath, these funds were significantly impacted by the unexpected rally in the yen, as many had substantial bets against the Japanese currency.
Between August 1 and 5, global macro quantitative funds posted losses between 1.5% and 2.5% due to their short yen positions. After experiencing over 2% losses in July, these funds are down between 4% and 5% year-to-date, despite posting gains of almost 8% in April. This drawdown presents a challenging recovery path before year-end, according to Jon Caplis, CEO of PivotalPath. Caplis noted that while many global macro managers anticipated benefiting from market dislocations, the recent developments have led to some disappointment.
