* Global investors sees Japan as "cyclical market"
* Need for downside protection rising ahead of US election
* Mid-cap domestics, REITs may fare well
By Tomo Uetake
TOKYO, Sept 19 Japanese equities are vulnerable
to global political risks because overseas investors essentially
see Japan as one of the most sensitive markets to global growth
concerns and swings in sentiment, a Japan-focused fund-manager
As Japan could take the brunt of a U.S. rate hike and
possible rising protectionism after the U.S. presidential
election, the Dutch hedge fund Pelargos Capital is focusing more
on mid-cap stocks and real estate investment trusts (REITs) with
less exposure to the global macro factors.
"Japan is very much exposed to sentiment of foreign
investors coming in and out of the markets," Richard Dingemans,
Pelargos chief executive officer, told Reuters.
"Many of them don't really care about company-specific
fundamentals. If the global economy is good, they buy Japan
-they buy the Nikkei futures and they don't worry about anything
else. Japan is just a cyclical market."
Many global investors use the Nikkei as a proxy for
bets on global economy, especially at a time of crisis, because
the Japanese market opens first and offers liquidity that many
other markets cannot match.
The day Brexit became a reality was a good example,
Dingemans says. As early voting results came in, his co-manager
sold the Nikkei futures heavily to protect their exposure.
Noting the need for adequate downside protection, Dingemans
said Pelargos had bought out-of-the-money put options to get
over the U.S. election because "at some point, the market will
start pricing in the neck-to-neck race and will become nervous
about Donald Trump".
Dingemans said, although there were a few large caps they
like for company specific reasons, their "long book" had a lot
of exposure towards mid-cap domestics and REITs, which are less
exposed to global macro factors and swings in sentiment.
"I think there are more value in mid cap stocks - and less
earnings volatility and less risk of big downward share price
Pelargos Capital, based in The Hague, had 220 million euro
($246 million) in assets under management as of Aug. 31.
($1 = 0.8943 euros)
(Reporting by Tomo Uetake; Editing by Alison Williams)