January 2020 – Smart Money Asia

Coronavirus – How to Protect Your Investments

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What a year this month has been! I can’t believe I wrote a 2020 Investment Outlook just nine days ago and talked about trade and geopolitical tensions in the Middle East as potential trapdoors for markets, without any mention of epidemics. Things certainly do develop quickly!

Most importantly here, the sensible advice when it comes to protecting yourself and your family from the coronavirus is to wash your hands thoroughly and often. There’s a lot of alarmist “fake news” out there but this article keeps things very simple.

So what’s the equivalent of washing your hands for your investment portfolio? In yesterday’s LinkedIn post, Bridgewater Associates founder Ray Dalio put it quite succinctly: “When you don’t know, the best investment strategy is to be smartly diversified across geographic locations, across asset classes, and across currencies.”

If you are a regular reader of this blog, then hopefully he is preaching to the choir. Here’s a post I wrote in October 2018 titled “Don’t Panic”.

A couple of points I would clarify for individual investors, and expats in particular:

Diversification is important, but make sure your weighting to each asset class fits your risk profile. Conservative investors and people close to retirement should have a heavier weighting to cash and bonds than a young, growth-oriented investor.
Dalio mentions diversification across currencies, which is by no means a bad thing, but remember it’s also important to build assets in your base currency to minimise currency risk.

So stay safe out there: don’t panic, wash your hands and stay diversified.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

2020 Investment Outlook

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And just like that, another year is gone! After a long wait for the 2019 Rugby World Cup to get started in Japan, the six-week tournament went by in a flash. And now here we are looking forward to the Olympics. I hope 2019 was a rewarding year for you.

When it came to markets, it was one of the best years for risk assets since the Global Financial Crisis with the S&P finishing +30.7%, MSCI Europe +27.1%, MSCI UK (despite Brexit) +16.4%, Japan Topix +18.1%, MSCI Emerging markets +18.4%. Crude oil was +22.7% for the year and Gold +18.3%. This appetite for risk meant that safe haven government bonds were subdued, while US High Yield and Emerging Market bonds returned +14.3% and +12.6% respectively. Bitcoin once again refused to die and posted an impressive return of +95% for the year.

Looking forward to this year “Don’t expect a replay of 2019” seems to be a recurring message, particularly when it comes to equities. Once again Bloomberg have compiled a thorough Wall Street round up for people who have the time:

For those who like to keep it simple, here is a list of key themes to look out for:

The end of the bull cycle is getting nearer, but it is still not here yet…
Equity and bond market valuations are significantly higher than they were a year ago.
Central banks are likely to continue pursuing ultra-loose monetary policy.
Smart investors remain invested but are staying alert and perhaps reducing risk.
The recent escalation between the US and Iran highlights the potential for sudden geopolitical shocks.
There is still potential upside for gold if/when things get rough.
Don’t let the US election distract you too much. Politics are not necessarily a good indicator of market returns.
Trade is again likely to dominate headlines and unsettle markets from time to time.
The Bitcoin halving occurring in May is likely to dominate crypto talk – here’s a detailed and rather bullish post on that for those interested.

At risk of repeating myself year after year, planning and strategy don’t need to be complicated:

Have a plan! Read this post if you don’t have one.
Stick to your guns. Don’t let the noise divert you from your commitment to saving and investing. (the Japan market made most of its returns in the last third of 2019. If you weren’t buying in the first two thirds then you missed it)
Diversify and rebalance – particularly if you are heavily invested in stocks and coming off a good year.
Max out tax advantaged investments such as NISA.
Look for Japan stocks that are likely to benefit from the Olympic buzz (see what happened to The Hub stock price around Rugby World Cup time)
Keep an eye on what the bank of Japan are buying – see post here.

With that I wish you all the best for 2020 and hope you enjoy the Tokyo Olympics!

Japan ETFs for 2020

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Cheers everybody! I’ll have what they’re having!

Happy New Year! I wish you all health, wealth and happiness for 2020. Most of us are settled back into work now, and some of you may even be planning your investment strategy for the year to come. Perhaps you are considering how to allocate your NISA contributions, or just wondering how things will play out over the next 12 months? There is a lot of investment chatter around the Olympics of course, but it’s also interesting to note what Japan’s central bank is doing.

I saw the above chart on a tweet from Zerohedge towards year-end. It has been widely publicised that the Bank of Japan have been big buyers of Japan Exchange Traded Funds over the last three years, but what exactly are they buying? And if you were buying Japan stocks at this time, would that influence your choices?

It turns out that the BOJ don’t simply buy only the Nikkei or Topix indices. As part of their overall public policy, the BOJ send a message by focussing on stocks of companies that actively engage in capital and human resources investment. (see here) In order to encourage companies to invest in their people and long-term assets, the BOJ is willing to invest some 300 billion yen per year. (their actual purchases can be tracked here so you can keep an eye on whether they are still buying)

A big issue the BOJ face is that they are constrained to not purchase more than half of the market value of any one ETF. The rest should be held by private investors. There are only a handful of ETFs that fit the definition of capital / human resources investment ETFs and, as the Japanese public have been slow to wake up to the idea of investing in this area, it is hard for the BOJ to find anything big enough to allocate the whole 300 billion yen to.

What that means is, that if you invest in one of these ETF’s, you are effectively giving the central bank the ability to “match” your investment. Every ¥10,000 the public invest adds ¥10,000 to the capacity the Bank of Japan have to buy that same fund. That’s a pretty heavy hitter you’ll be investing alongside!

The following ETFs look like they would fit the investment criteria:

1479:JP Daiwa ETF MSCI Japan Human and Physical Investment Index

1484:JP One ETF JPX/S&P CAPEX & Human Capital Index

1480:JP Next Funds Nomura Enterprise Value Allocation Index

It’s also interesting to note what happens with the money that can’t be invested due to lack of capacity: It is allocated to a JPX-Nikkei 400 ETF. It turns out that companies in this index have been quick to wake up to the prospect of big investment from the BOJ and have been making an effort to increase capital and human resources investment, which then acts as a stimulus to the real economy.

So if you are a buyer of Japan stocks today, and I’m not saying you should or shouldn’t be, but if you were, wouldn’t you want to have some of what the BOJ are having?