As
Japanese
stocks
plummet,
confirming
a
bear
market,
there
are
opportunities
in
small-cap
and
domestic-focused
companies,
according
to
fund
manager
Richard
Kaye.
Kaye,
one
of
the
co-fund
managers
behind
the
Growth
Japan
fund
at
Comgest,
believes
the
current
market
turmoil
presents
a
chance
to
invest
in
overlooked
sectors
as
foreign
investors
exit
certain
positions.
The
Topix
–
a
market-weighted
index
of
Japanese
stocks
—
has
fallen
24%
from
its
July
highs.
It
fell
3.2%
on
Thursday,
6.1%
on
Friday
and
12.2%
on
Monday,
marking
the
worst
day
for
the
Topix
since
1987.
This
dramatic
sell-off
comes
as
the
Yen
strengthened
against
the
dollar,
reaching
levels
not
seen
since
January.
‘Yen
is
just
getting
normal’
Kaye
believes
the
Yen’s
appreciation
is
a
return
to
normalcy
rather
than
an
anomaly.
“The
Yen
is
just
getting
normal,”
he
told
CNBC’s
Squawk
Box
Asia
Monday.
“Remember
that
for
decades,
the
Yen
was
moving
in
the
120
–
130
band
versus
the
dollar.
It’s
just
going
back.”
This
currency
shift
is
causing
a
significant
unwinding
of
the
Yen
carry
trade,
where
investors
borrow
in
low-interest
Yen
to
invest
in
higher-yielding
assets
elsewhere,
such
as
U.S.
stocks.
Kaye
believes
this
trend
will
continue:
“The
yen
carry
trade
is
history,
and
we’re
heading
back
to
a
very
different
situation.”
JPY=
1Y
line
The
move
in
Yen
has
hit
Japanese
companies
that
make
most
of
their
money
abroad
—
such
as
Toyota
and
Sony
—
which
previously
benefitted
when
the
Yen
depreciated
to
all-time
lows
against
the
U.S.
dollar.
While
large
exporters
and
banks
are
feeling
the
pressure,
Kaye
sees
promise
in
other
areas
of
the
market.
“If
you
look
even
on
Friday
in
all
the
bloodbath,
domestic
names,
small
cap
names
[were]
actually
outperforming,”
he
noted.
Indeed,
the
MSCI
Japan
Small
Cap
index
has
fallen
8.6%
since
July
11,
outperforming
the
14.4%
decline
in
the
MSCI
Japan
index
on
a
local
currency
basis.
In
U.S.
dollar
terms,
the
losses,
while
proportionate,
are
smaller,
with
ETFs
such
as
the
iShares
MSCI
Japan
Small-Cap
ETF
falling
by
2.1%
compared
to
the
iShares
MSCI
Japan
ETF,
which
is
down
8.9%
over
the
same
period.
The
WisdomTree
Japan
SmallCap
Dividend
Fund
has
outperformed
both
iShares
ETFs.
SCJ
EWJ
line
2024-07-11
“I
particularly
emphasize
the
whole
small
cap
space,”
said
Kaye.
“A
lot
of
them
are
domestic
names.
They’ve
got
great
earnings.
They’ve
been
really
beat
up,
and
guess
what?
They’re
starting
to
outperform
in
this
market
environment.”
“And
I
think
that’s
where
we’ll
see
a
lot
of
the
market’s
general
support
come
through,
[which]
is
from
small
caps
and
also
domestic
names,”
he
added.
Kaye
named
supermarket
retailer
Kobe
Bussan
as
an
example
of
a
domestic-oriented
business
that
could
show
strength
in
the
market
as
the
Yen
appreciates.
The
stock
was
in
the
green
Monday
despite
the
broader
market
sell-off.
The
stock
is
also
thinly
traded
in
the
U.S.
The
sell-off
is
largely
driven
by
what
Kaye
terms
“hot
money”
—
short-term
foreign
investors
who
had
reallocated
funds
to
Japan,
particularly
banks
and
yen-sensitive
exporters,
from
other
markets.
He
explained
that
these
investors
were
reallocating
funds
from
other
markets
to
Japan,
for
instance,
to
move
away
from
the
U.S.
stock
market’s
high
concentration
in
a
few
large
tech
stocks
or
seek
diversification
away
from
Chinese
equities
due
to
geopolitical
risks.
As
a
result,
Japan
became
a
default
choice
for
many
of
these
investors
seeking
alternatives,
especially
after
Warren
Buffett’s
investment
in
five
Japanese
general
trading
firms
Itochu
,
Marubeni
,
Mitsubishi
,
Mitsui
,
and
Sumitomo
.
“That
hot
money
is
basically
saying
sayonara
now,”
Kaye
said.
“And
when
it’s
out,
we
go
back
to
more
rational
markets
focused
on
those
good
and
slightly
beaten-up
sectors
that
we
talked
about.”
“I
see
quite
a
flood
of
money
coming
back
from
those
investors
to
the
domestic
market,
beginning
in
sectors
like
I’ve
said,
which
have
been
beat
up
for
two
or
three
years,”
he
predicted.
