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First Trust Announces the Launch of a New ETF

First Trust Advisors (“First Trust”) announced the launch of a new ETF, the First Trust New Constructs Core Earnings Leaders ETF (FTCE) (the “fund”), according to a statement obtained by Funds Society.

“The fund seeks investment results that generally correspond to the price and performance (before the fund’s fees and expenses) of a stock index called the Bloomberg New Constructs Core Earnings Leaders Index,” the firm’s release states.

New Constructs determines core earnings by reviewing company reports and identifying non-core and non-recurring gains and losses through its proprietary rating system, using a combination of technology and expert analyst review.

Additionally, FTCE provides exposure to companies that are part of the Bloomberg New Constructs Core Earnings Leaders Index (BCORE). BCORE uses a quantitative approach to select the top 100 companies from the Bloomberg 1000 Index (B1000) with the highest earnings quality, based on Earnings Capture. A positive Earnings Capture reflects stronger business fundamentals and may present an investment opportunity, the statement adds.

“The rise in valuations has been a key driver of returns in the current bull market, while earnings growth has been more moderate. Consequently, for the bull market to continue, we believe investors may focus more on stocks with the potential to deliver high-quality, repeatable earnings,” said Ryan Issakainen, CFA, Senior Vice President and ETF Strategist at First Trust.

Meanwhile, Allison Stone, Head of Multi-Asset Products at Bloomberg Index Services Limited, commented, “It’s exciting to work with First Trust and see how our differentiated approach to earnings analysis is available to investors through an ETF. We’ve combined Bloomberg’s leading data and research with New Constructs’ analysis to create the index with a fresh perspective on the true earnings of companies.”

BECON IM and New Capital Announce That Their Series of Fixed Maturity Bond Funds Has Raised 400 Million Dollars

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Becon IM y New Capital lanzan fondos de bonos

BECON Investment Management, in partnership with New Capital, announced on Monday the close of the fifth issuance of Fixed Maturity Bond Funds, significantly surpassing initial expectations, according to a statement.

“With this latest issuance, which raised 65 million dollars, the total for the five series exceeds USD 400 million, consolidating both firms’ positions as leaders in the fixed-income market for Latin American and US Offshore investors,” the statement adds.

Fred Bates, an executive at BECON IM, highlighted the success of the FMP series, affirming that “we are committed to continuing to launch new products and share classes that are relevant to our clients in the US Offshore and Latam markets. New Capital is a highly dynamic firm with the ability to quickly adapt to investors’ needs.”

Juan Fagotti, also an executive at BECON IM, emphasized the depth and diversity of New Capital’s product offerings, underscoring the importance of providing tailored solutions for each investor profile.

“Each of the five fixed maturity funds, with maturities staggered from 2025 to 2029, has been marked by a rigorous and diversified investment strategy focused on active bond selection, geographic diversification, and active risk management,” said representatives from BECON IM.

“The success of this fund series reflects the growing demand for fixed-income products among investors in Latin America and the US Offshore market. In an environment of low-interest rates and high uncertainty, investors are seeking investment alternatives that combine stability and potential returns,” they added.

In addition to the Fixed Maturity Bond Funds, New Capital offers the New Capital USD Shield Fund (a short-duration, high-quality fixed-income fund) and the New Capital Global Value Credit Fund (a fund focused on relative value corporate bonds, designed for investors with a longer-term investment horizon and tolerance for a higher level of risk).

HSBC Mexico Launches a Balanced Fund in Dollars

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HSBC Asset Management Mexico has launched the HSBCMDL Multi-Asset Balanced Fund in Dollars, “an option designed for investors seeking diversification and a global portfolio referenced in U.S. dollars without actively seeking exposure to Mexican assets,” according to the firm.

According to the institution, the fund’s primary goal is to generate long-term returns by investing in dollar-referenced global debt and assets.

The HSBCMDL Fund invests in equities from developed and emerging markets, treasury bonds, and other global debt instruments, providing diversified exposure to the world’s leading economies with a focus on dollar-denominated assets.

The investment process follows HSBC Asset Management’s global guidelines and focuses on active risk and performance management, adapting to changing market conditions to optimize the asset mix over time.

Antonio Dodero, Executive Director of HSBC Asset Management Mexico, explained, “The launch of the HSBCMDL Fund addresses the growing need for investment solutions that align with local market expectations. This new offering also strengthens HSBC Asset Management Mexico’s relationship with clients seeking innovative financial products.”

HSBC also reported that the fund’s availability is 24 hours after execution, with a recommended minimum holding period of three years. It is aimed at both individuals and corporations and operates Monday through Friday from 8:00 to 13:30 (Mexico City time). Various fund series are available to accommodate the specific needs of each investor type.

The HSBCMDL Multi-Asset Balanced Fund in Dollars offers global exposure across various asset classes and geographic regions, with a balanced portfolio of approximately 50% in equities and 50% in debt. The fund’s active management allows investors to benefit from opportunities presented by the global economic environment.

Additionally, investment in pesos with a dollar reference allows investors to capture both financial instrument returns and exchange rate movements. It’s important to note that the fund does not invest in Mexican assets, except for occasional short-term peso cash positions or those implied in collective investment instruments.

“The ideal investor profile includes individuals or entities looking to diversify their portfolio with foreign investments, seeking dollar exposure, and who can tolerate exchange rate fluctuations. This profile also includes those preferring professional management of their investment, with assets distributed according to global market conditions, focusing on a balanced mix of equities and debt,” Dodero explained.

HSBC Mexico provides further information on the fund through its official HSBC Asset Management Mexico page

EJE Investment Aims to Win Over Chilean Investors With Section 8 Real Estate Assets in Miami

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(cedida) Patricio Eskenazi, socio de EJE Investments

EJE Investment, a young international real estate advisory firm, aims to attract Chilean investors with Section 8 subsidized rental properties in Miami. With the Chilean real estate market going through a crisis, local investors are searching for different vehicles to secure rental income, which EJE believes can be found in U.S.-based assets.

“In Chile, the appetite for the real estate market is negative,” highlights Patricio Eskenazi, a partner of the firm, in an interview with Funds Society. “But that doesn’t change the fact that people love investing in real estate, because it’s a very solid asset,” he adds, with tangible guarantees and monthly cash flows.

When people invest in real estate domestically, they can do so directly or through a fund that invests in this asset class. In contrast, foreign investment has a broad range of funds available but high entry barriers for direct purchases.

“Why did people invest in an apartment in Independencia or Huechuraba and not in Miami? The simple and obvious answer is that it’s what was accessible and what they knew how to do,” he says. On the other hand, although investors hear about good opportunities in Miami, they don’t know how to access that market.

Along these lines, Eskenazi highlights that EJE Investment provides comprehensive advisory services, including legal matters, investment structuring, and a network of service providers in the United States, without holding client funds.

This means support throughout the entire process: buying the houses, negotiating, hiring a manager, arranging bank loans, legal procedures for registration, tax advice for structuring a company in one of the two jurisdictions, etc.

For clients, the partner explains, “we leave them receiving rents.” Moreover, he emphasizes that clients do not need to set foot in the U.S. to acquire the asset or obtain financing, as there are banks specializing in loans to foreigners.

The Appeal of Section 8

EJE Investment’s approach is anchored in a particular mechanism that, according to Eskenazi, offers a more attractive investment profile: the Section 8 subsidy, a government program aimed at people who have difficulty paying the full rent.

“It’s much more profitable and much safer,” explains the professional, with less risk of non-payment since “you receive two payments: one from the tenant and another from the U.S. government.”

On average, the U.S. Treasury pays around 80% of the property’s rent, with the remaining 20% covered by the family. In some cases, this portion can reach 90% or even 100%, reducing the portion of cash flow at risk of non-payment by the tenant.

Additionally, Eskenazi notes that these are more profitable businesses since houses rented by families with Section 8 subsidies rent for 20% to 30% above a non-subsidized rent.

“If you buy one of the houses we’re always buying, at $440,000, you’ll rent it in the private market for around $2,400 or $2,500. But if you rent it to a family with Section 8, you’ll rent it for about $3,000,” illustrates the partner at EJE.

Regarding assets, the firm works with all types of residences, including houses, apartments, and townhouses, which are already built. The average age is between 10 and 15 years, he notes.

Although they don’t rule out evaluating opportunities in other markets, the Chilean firm is focusing on Miami for now, where they see many opportunities. “For now, we’re set for a good while in Florida,” says Eskenazi, adding that this area is more familiar to Latin American investors.

In the first half of the year, representatives from the real estate investment firm traveled to Kansas and found attractive investment opportunities, but people find it more challenging to venture into that city compared to Miami.

Expanding Access

“We’ve done extremely well, and we started less than a year ago. That’s because people who had bought something here in Chile realized that the rents aren’t very good,” explains Eskenazi. Part of the interest also comes from a segment that traditionally hasn’t had access to this sector: people outside the high-net-worth circle.

The largest portfolios in the Chilean market have been participating in this business for years with a different dynamic. “The institutional world and larger investors seek very large investment sizes,” explains EJE’s partner, adding that this justifies mobilizing the necessary resources to structure the investment.

EJE’s model, meanwhile, offers access to investors who can invest around 3,000 UF, equivalent to around $123,000. The cheapest property costs 6,000 UF ($246,000), but half covers the down payment, says Eskenazi.

In the range between that amount and the band of $30 million to $50 million, “there’s been a lot of interest,” says the professional, with higher-net-worth investors purchasing multiple assets.

“We started with the high-net-worth segment, but a lot of people who wouldn’t be considered high-net-worth in the Chilean industry have reached out,” adding that “you don’t need to be high-net-worth to buy a house.”

The backdrop is that “investment alternatives in Chile are quite limited now,” according to the executive. In this context, two trends work in favor of EJE’s model: the rise of alternative assets in Chile and the outward flow of local investments abroad.

For now, the firm plans to continue focusing on Chilean clients. In the future, when they seek new markets, they anticipate doing so alongside local partners familiar with specific legal frameworks and who can instill trust through local familiarity.

Origin Story

The search for different investment opportunities brought together the four partners who founded EJE Investment last year.

Eskenazi comes from the financial industry, where he is a familiar face. Alongside a 20-year career, which includes positions in Itaú Chile’s private banking, MCC Inversiones, Banco Penta, and the family office Monex Inversiones, according to his LinkedIn profile, the executive is a panelist on the economic radio program “Más que números.”

Seeing that the local Chilean market was “bad,” he began looking for foreign alternatives, leading him to meet brothers Rodrigo and Jack Jaime. Rodrigo has a 17-year real estate career, including the development and construction of six buildings for Chile’s largest senior housing operator, and a diploma in Real Estate Law from the Universidad de los Andes. Jack also has studies in this field and holds the CIPS (Certified International Property Specialist) designation from the National Association of Realtors in the U.S.

According to Eskenazi, the Jaime brothers had been investing in Section 8-related individual assets in Miami on their own for over 10 years when they met. Then, the idea arose to leverage their collective expertise into a service for others. “If the market is so large and deep, and we can buy a house every three to five years, why not do it for clients as well?” he illustrates.

While formulating what would eventually become EJE Investment, they concluded that a key ingredient was guiding investors through the entire process, “taking the client by the hand.” This led them to bring on a fourth partner to handle legal and tax advisory: attorney Patricio Escobar, a tax law specialist who led the Tax and International Transactions practice at EY in Miami—where he lives—and Boston.

Hamilton Lane Launches Two New Infrastructure Funds for Clients in Latam and the U.S.

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Hamilton Lane has launched the Global Private Infrastructure Fund (“HLGPI”) and Private Infrastructure Fund (“HLPIF”), offering accredited investors worldwide greater access to private market infrastructure investments, according to a statement accessed by *Funds Society*.

The Hamilton Lane Global Private Infrastructure Fund (“HLGPI”) is available to qualified investors, including high-net-worth (“HNW”) investors and their wealth advisors, in EMEA, Australia, Canada, Latin America, and Southeast Asia.

On the other hand, the Hamilton Lane Private Infrastructure Fund (“HLPIF”) is a closed-end, continuously offered investment vehicle registered under the Securities Act of 1933 and the Investment Company Act of 1940 (“’40 Act”) and is available to U.S. clients, including HNW investors and their wealth advisors.

HLGPI and HLPIF are total return strategies aimed at both capital appreciation and income, designed to provide exposure to a global portfolio of institutional-quality infrastructure assets through a single investment, the firm’s information adds.

“Focused on identifying and capturing strategic opportunities in infrastructure, including direct and secondary investments, the Funds aim to deliver attractive returns and downside protection, along with liquidity through monthly or quarterly redemptions,” the fund explains.

Both HLGPI and HLPIF seek to capitalize on unique opportunities in the electricity, transportation, data and telecommunications, environment, and energy sectors, according to Hamilton Lane.

For over 24 years, Hamilton Lane has developed SMA mandates (as per the English acronym) focused on infrastructure, designed to deliver attractive returns relative to benchmarks for clients of all sizes worldwide. These new vehicles are an extension of Hamilton Lane’s broader infrastructure platform, which the firm has been building since 2000 and includes closed-end funds and SMAs totaling nearly $72 billion in assets under management and supervision as of June 30, 2024, the firm explains.

The SEC Awards $12 Million in Compensation to Whistleblowers

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The SEC announced a $12 million award to be split among three joint whistleblowers who provided critical information and assistance in an enforcement action by the agency.

The whistleblowers offered key information and “extensive cooperation,” which helped expand the scope of the investigation and the charges filed in the enforcement action, and also saved the agency significant time and resources, according to the regulator’s statement. The individuals met numerous times with the SEC’s enforcement staff, and some faced hardships due to their reporting.

“The whistleblowers played a key role in helping the SEC hold wrongdoers accountable,” said Creola Kelly, Chief of the SEC’s Office of the Whistleblower, adding that “even when an investigation is already underway, whistleblowers can contribute by providing new information on misconduct.”

Whistleblower payments are made through an investor protection fund, established by Congress, which is entirely financed through monetary penalties paid to the SEC by violators of securities laws.

Under the law, whistleblowers may be eligible for a reward when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10 to 30 percent of the money collected when monetary sanctions exceed one million dollars.

As established by the Dodd-Frank Act, the SEC protects whistleblower confidentiality and does not disclose any information that could reveal their identity.

Managers Believe That Small and Micro Caps Will Benefit From the Fed’s Rate Cuts

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Small y micro caps beneficiarán de recortes de la Fed

The latest survey by New Horizon Aircraft reveals that 75% of fund managers specializing in the small and micro-cap segment believe the interest rate cut cycle initiated by the U.S. Federal Reserve (Fed) will considerably benefit the valuation of these companies. This survey included fund managers from the U.S., Canada, Europe, the Middle East, and Asia, who collectively manage assets worth $82.4 billion.

Another conclusion from this survey is that 59% of managers believe the Fed will cut rates at least once more in 2024, while 16% think there will be only one more rate cut before the year ends. Additionally, fund managers expect the Fed to continue with cuts: 19% anticipate three cuts in 2025, 59% expect two cuts, and 20% predict only one cut.

According to the survey’s authors, this expectation of multiple rate cuts aligns with 82% of the surveyed managers who believe U.S. interest rates will have fallen from the current 4.9% to 4.3% or lower by the end of 2025. Approximately 14% even think the rate could drop below 4.1%.

Since 40% of the debt of companies in the Russell 2000 Index is short-term or variable rate, compared to around 9% for companies in the S&P, 89% of fund managers expect that the anticipated drop in interest rates will have a more positive impact on the valuations of micro and small-cap companies than on large-cap companies. Seven percent of fund managers were unsure, and only 4% disagreed.

Experts caution that although U.S. inflation decelerated to 2.5% year-over-year as of August 2024, it still remains above the Federal Reserve’s 2% target. Nevertheless, 89% of respondents believe the 2% target will be achieved within the next 12 months, specifically in the second quarter of 2025.

The survey authors emphasize that these perspectives bode well for the valuations of micro and small-cap companies, as evidenced by the 99% of respondents who expect the economy in 2024 and 2025 to provide a more favorable basis for the valuations of these smaller firms. In the current context, with global small-cap companies trading at the steepest discount to large caps in over 20 years, the same proportion (99%) of fund managers expect micro and small companies to generate solid returns over the next 12 months.

“Expected Fed rate cuts could significantly benefit small and micro-cap companies. This view is shared by the fund managers who participated in our research, all of whom specialize in managing funds that invest in emerging small and micro-cap companies with high growth potential. Small-cap companies with unique and transformative technologies are once again in a position to offer investors an opportunity for significant gains,” concludes Brandon Robinson, CEO of Horizon Aircraft.

Managers Are Exploring More Liquidity Solutions, Investment Vehicles, and Value Creation to Strengthen the Momentum of Alternatives

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According to the latest survey from Goldman Sachs Asset Management titled *2024 Private Markets Diagnostic Survey, Charting New Routes,* conducted with 235 institutions and fund managers worldwide, demand for private market assets is expected to continue rising. Investor optimism and expectations of uncovering new opportunities across strategy classes are driving this growth. The survey also indicates a reduction in concerns around potential economic recession or inflation resurgence, with investor attention now focused more on geopolitical risks from global conflicts.

One key finding from the report is that sentiment is generally positive across all asset classes, with fund managers displaying more optimism than wealth managers. Even in the real estate sector, often considered the most challenging asset class, 38% of asset managers see improved investment opportunities, compared to 31% who perceive worsening prospects.

Investors remain confident in venture capital funds and optimistic about infrastructure, believing these assets can continue delivering stable returns through market cycles. Meanwhile, private credit has seen a slight decline in favorability among nearly a quarter of Limited Partners, though net sentiment remains positive.

“Investor sentiment is improving overall, even in asset classes like real estate that faced headwinds over the last two years. Limited Partner focus on macroeconomic risks has diminished as inflation moderates and interest rates drop. However, concerns persist over inflated valuations and their impact on trading volumes,” explained Jeff Fine, co-head of Goldman Sachs Alternatives’ Capital Formation.

According to Dan Murphy, Head of Alternative Portfolio Solutions at Goldman Sachs Asset Management, “Investors are creating asset allocations in new areas of private markets, including private credit and infrastructure, through various entry points such as secondaries and co-investments.”

Key Trends and Concerns

The survey highlights liquidity as a top priority for investors. Fund managers are increasingly exploring liquidity solutions to return capital to investors, as exits are still hindered by ongoing macroeconomic uncertainty and valuation disconnects between buyers and sellers. “While some Limited Partners face over-allocation issues, private markets generally remain underweighted, with strong demand for new entry points like co-investments, secondary investments, and semi-liquid vehicles,” noted Stephanie Rader, global co-head of Alternative Capital Formation at Goldman Sachs Alternatives.

Geopolitical conflict now tops investor concerns at 61%, followed by inflated valuations at 40%, and recession risk at 35%. Limited Partners are relatively more focused on valuation-related risks, recession, and inflation, while General Partners place greater emphasis on interest rates and regulatory challenges.

Due to widespread underweighting, 39% of Limited Partners are increasing their capital deployment, while only 21% are reducing it, a significant change from last year’s 39% reduction. Capital deployment is now concentrated on credit strategies (34%)—where underweighting is most pronounced—followed by private equity (18%), real estate, and infrastructure (10% each).

Challenges in the Industry

To address valuation gaps, General Partners focus on value creation through revenue growth: 63% aim to boost organic revenue via existing channels, and 52% through new channels. Other significant value creation avenues include mergers and acquisitions (45%), margin improvement via technology and efficiency (35%), and introducing new products or services (27%).

As exits remain sluggish and valuations appear inflated, private equity managers are prioritizing profit growth as the primary source of value creation. Strategic sales are expected to remain the primary exit route (81%), followed by sponsor sales (70%), though optimism toward IPO markets has declined. Demand for interim liquidity solutions, such as dividend recapitalizations (54%), continuation vehicles (52%), and preferred shares (44%), is on the rise. In recent years, most General Partners have expanded their capabilities, either organically (46%), through spin-offs (24%), or via acquisitions (5%).

“General Partners are broadening their product offerings in both strategies and structures, often seeking external capital to support these expansion plans,” stated Ali Raissi, global co-head of Goldman Sachs’ Petershill Group.

Sustainability is also a central consideration in private markets, especially for large Limited Partners outside the Americas. Adoption varies based on the asset base, with larger cohorts more likely to integrate sustainable factors and wider stakeholder concerns (84%). “We continue to observe significant attention to sustainable investing from major investors, particularly in EMEA and APAC, although LPs generally have more progress to make toward their goals,” said John Goldstein, global head of Sustainability and Impact Solutions, Asset & Wealth Management at Goldman Sachs.

With the macroeconomic environment relatively stable, Limited Partners and General Partners express growing optimism across all asset classes. They see the post-COVID-19 normalization process ongoing and the long-term growth trajectory of private markets as strong. “New frontiers in AI, investment vehicles, and value creation are increasingly explored, driven by both opportunity and necessity. Looking ahead, we expect both LPs and GPs to continue adapting to an evolving private markets landscape that plays an increasingly vital role across sectors and regions,” Murphy concluded.

DWS Launches the Global Xtrackers Infrastructure ETF With ESG Criteria

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DWS lanza ETF de infraestructura con criterios ESG

DWS expands its Xtrackers ETF range with the launch of the Global Xtrackers Infrastructure ETF, a product that reflects the performance of infrastructure securities meeting environmental, social, and governance (ESG) criteria. According to the asset manager, this is the first ETF to follow the ESG variant of a broad traditional infrastructure index.

With the Xtrackers Global Infrastructure ESG UCITS ETF, DWS aims to provide access to companies that deliver energy, transportation, and communication infrastructure, among others. The firm expects companies in these segments to experience comparatively minor fluctuations in fundamentals throughout the economic cycle. The ETF began trading last week on the London and German stock exchanges, with a fixed annual fee of 0.35%. The ETF seeks to closely track the Dow Jones Brookfield Global Green Infrastructure Index, calculated since 2016, reflecting the performance of 73 listed infrastructure companies, mostly based in industrialized countries and adhering to ESG criteria.

According to DWS, electric utility companies make up the largest part of the index, around 32%, followed by telecommunications infrastructure, mainly mobile tower REITs (19%), multi-business companies offering a wide range of products (11%), and construction and engineering firms (10%). The oil and gas storage and transportation sector, which is heavily represented in traditional infrastructure indexes, makes up less than 1% of the Dow Jones Brookfield Global Green Infrastructure Index.

DWS explains that, by country, the United States leads with 15 listed companies and a weighting exceeding 46%, followed by Spain, France, and the United Kingdom, each with five companies and a combined weighting of 29.5%. The index also includes 13 Chinese companies, with a total weighting of 2.6%. The largest individual holdings, according to DWS, are the U.S. transmission tower operator American Tower, with an index weighting of approximately 9.5%, and the French infrastructure and construction group Vinci, with 7.9%.

“The need for infrastructure beyond fossil fuels is growing rapidly as governments and companies worldwide work to develop more sustainable infrastructures focused on electrification and information technology. The index offers broad, global exposure to infrastructure but places particular emphasis on projects reliant on greener technologies,” says Michael Mohr, Head of Xtrackers Product at DWS.

Japan Is Regaining Its Direction and Appeal for Equity Investors

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Japón recupera atractivo para inversores

After decades of economic and market stagnation, Japan may be on a path to sustainable recovery, reigniting investor interest in the opportunities Japanese equities offer in this new context. Experts from Vanguard believe that Japan’s paradigm is shifting, shaking off a previously resigned mindset. “The Bank of Japan may go further in its rate hike campaign, which began earlier this year, and the recent change in the country’s Prime Minister is unlikely to halt this momentum,” they note.

Shuntaro Takeuchi and Donghoon Han, managers at Matthews Asia, explain that many investors are understandably questioning the direction of Japan’s stock markets. It’s worth remembering that the market performed well until June but then shifted. The aggressive interest rate increase announced by the Bank of Japan on July 31 preceded weak economic data from the U.S. These factors combined to trigger an unexpected liquidation of yen carry trades, which wreaked havoc on global stock markets, especially in Japan. The Nikkei 225, or Nikkei Stock Average, dropped 12.4% on August 5, its largest decline since the day after the U.S. Black Monday crash in 1987.

“Japanese stocks recovered much of their losses in August, but volatility persists. Weak U.S. economic data and ongoing concerns about the sustainability of the artificial intelligence (AI) boom continue to cause sharp movements in stock prices, along with a strengthening yen. In our view, investors are likely to remain focused on macroeconomic issues. The Bank of Japan has indicated that more rate hikes can be expected, which could further strengthen the yen, while a U.S. rate cut cycle and a weakening dollar could negatively affect sentiment toward Japanese exporters. Moreover, if economic indicators start suggesting a further weakening of the U.S. economy, greater concerns about a slowdown in global trade—on which Japan heavily relies—could emerge,” they explain.

At Matthews Asia, the managers emphasize that recent exchange rate movements have not significantly impacted the profitability of high-quality Japanese companies. “In many areas, both for domestically oriented and international exporting companies, we continue to expect corporate earnings to grow at a mid- to high-single-digit percentage rate in yen terms, supplemented by healthy dividends and accelerated share buybacks, which could add another 2%-3% to total return potential. Japanese stock valuations are also attractive, trading at around 15 times earnings, roughly their average over the past 10 years,” state Takeuchi and Han.

Attractive Outlook

Beyond equities, experts at Vanguard believe that Japan’s structural changes extend beyond the impact on yield curves and currencies. The asset manager explains that in the past, surprise interest rate moves by the Bank of Japan (BOJ) made the Japanese fixed income market unattractive for foreign investors. Additionally, the BOJ holds the majority of Japanese government bonds (JGBs), creating an environment where prices and yields did not reflect true market forces.

However, they note that the BOJ has moved towards greater transparency, signaling its interest rate moves in advance. Although the BOJ still owns 55% of JGBs, it has reduced its holdings, increasing the likelihood that the yen will converge to its fair value.

For Vanguard, the conclusion for investors is that a market easily ignored in recent decades due to economic stagnation and BOJ dominance now appears to be a potential alpha source. “For better or worse, Japan has become much more interesting for investors, with market forces playing a more prominent role,” says Ian Kresnak, Investment Strategist at Vanguard.

According to Kresnak, in light of these changes, investors may consider their long-term asset allocation strategies. “A stronger yen would enhance the returns of Japanese stocks for a U.S. investor. Fixed income is a bit more complex. Higher interest rates would generate more short- to medium-term volatility, which a stronger yen could help offset. However, in the long run, higher yields indicate better future outcomes, reaffirming the role of Japanese bonds in globally diversified portfolios,” Kresnak concludes.

New Prime Minister

Investment firms agree that Japan’s new Prime Minister, Shigeru Ishiba, is a key factor in the country’s reactivation and the renewed attractiveness of its market. Mario Montagnani, Senior Investment Strategist at Vontobel, explains that Shigeru Ishiba’s unexpected victory in the race for the leadership of Japan’s Liberal Democratic Party signals a potential shift away from “Abenomics” policies.

The asset manager points out that Ishiba’s support for normalizing monetary policy and raising corporate taxes could significantly impact Japan’s financial landscape. Investors are reconsidering the prospects for Japanese equities and yen carry trades, examining how changes in interest rates, currency values, and fiscal policies could reshape investment strategies and market dynamics in the near future.

“We believe his emphasis on structural reforms, particularly the revitalization of rural areas, does not align with the growth-oriented approach of ‘Abenomics,’ which has supported Japanese stock prices in recent years. In fact, Ishiba previously criticized the BOJ’s aggressive monetary easing. Consequently, we believe investors may approach this shift in Japan’s political landscape more cautiously, potentially causing volatility or even a market correction in the short term, especially if expectations of aggressive monetary stimulus decrease. It’s worth noting that Ishiba himself recently downplayed speculation on this matter. Over the weekend, he emphasized that Japan’s monetary policy is expected to remain accommodative, implying a willingness to keep borrowing costs low to support still-fragile economic growth,” Montagnani explains.

Finally, Kelly Chia, an Asia Equity Analyst at Julius Baer, notes that Ishiba has reversed his stance on interest rates, fiscal stimulus, and tax increases, which has weakened the yen and helped to revalue stocks. She explains that after a period during which the stock market was affected by currency appreciation, recent developments under Japan’s new Prime Minister have changed market perspectives.

“Ishiba has reversed his stance in three key areas investors were focused on. He now supports keeping rates low (previously, he was in favor of raising them), has announced plans for a fiscal stimulus package (previously, he advocated for some austerity), and has backed off from tax increase plans. This was nearly the same approach the previous Prime Minister took upon taking office,” Chia explains.

The analyst’s main conclusion is that most investors already have a basic expectation that Japanese companies will improve profitability and increase shareholder returns, but she warns: “Failing to meet corporate reform expectations could lead to significant stock depreciation. Ishiba’s reversal from his previous stance has helped ease investor concerns.”