Inflation and Weak Yen, Can S&P 500 One-Shot Strategy Save the Investors? | FRIDAY DIGITAL

Inflation and Weak Yen, Can S&P 500 One-Shot Strategy Save the Investors?

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The U.S. stock market, which had been showing signs of bottoming out since the beginning of June, hit a new low for the year on renewed inflation. Many people are probably feeling anxious because of the boom in U.S. stock investment in Japan over the past few years. What stance should those currently invested in U.S. stocks take?

The turmoil in the financial markets has not abated. On June 15, the foreign exchange market saw the yen weaken to the level of 135 yen to the dollar, the strongest since October 1998 (photo: AFLO).

S&P 500-linked funds that triggered the U.S. stock boom

The eMAXIS Slim U.S. Equity (S&P 500) mutual fund led the recent U.S. equity boom. eMAXIS Slim is already Japan’s second largest fund with net assets of 1.22 trillion yen as of the end of May 2022, despite its launch in July 2018 (see “eMAXIS Slim U.S. Equity ( S&P 500) Fund” below).

As the name suggests, this fund is designed to track the U.S. stock index S&P 500, which is an index calculated by combining the stock prices of 500 leading U.S. companies. (Since it invests in an index, it is called index investing). There are a number of other funds that track the S&P 500, but “eMAXIS (S&P 500)” was a big hit because of its low trust fee.

According to S&P Dow Jones Indexes, which calculates the index, the total amount of financial products linked to the S&P 500 as of the end of May was about 4.6 trillion dollars, which would be about 621 trillion yen at 135 yen to the dollar.

Trends in net inflows and net asset value of “eMAXIS Slim U.S. Equity (S&P 500)” (Unit: billion yen, July 3, 2018 – February 10, 2022) ⋰ Mitsubishi UFJ International Asset Management announced in February 2022. From UFJ International Investment Trust press release.

The U.S. stock boom also attracted investment novices

In fact, many of the individual investors who purchased the fund were young people in their 20s and 30s with limited (or near zero) investment experience. According to an official of an online securities company, many of them are making accumulation investments through “Tsumitate NISA (New investment System for Advance Payment).

Veteran individual investors must have experienced the “peaks and valleys” of stock investment, having suffered losses many times. However, if you have never known losses since you started investing and have had smooth sailing, the current decline in U.S. stocks could be very damaging. This is especially true if you started investing in the U.S. stock market boom without much understanding of the risks of funds that invest in overseas stocks. As a result, we are concerned that a number of people may stop investing themselves. This is because the current downturn is different from those in recent years.

The Corona Shock in late February 2020 was even worse than this one, but the market bottomed out in late March and hit its pre-crash highs in late August. Perhaps the decline stopped as people panicked and said, “Oh, my God!” The decline stopped and the rebound was probably a relief to many people. The previous decline lasted from mid-September to mid-December 2018, triggered by a rise in long-term U.S. interest rates, but both the extent and duration of the decline remained minor compared to this time.

The declining market may continue through the end of the year.

Since the S&P 500 has fallen more than 20% from its highs, it is highly likely that the market has entered a “bear market” based on past experience. Once a bear market is entered, it often takes more than a year for a stock price to confirm a major bottom, and the rate of decline to a major bottom often exceeds 30%.

Applying this to the current situation, a somewhat optimistic scenario would be that the market will continue to decline during the year, and that there is still room for a decline of about 10%. Since this data is simply derived from past empirical data, the current decline may be mild, but on the other hand, it could be serious. However, if we assume that the market will continue to decline for some time, we can prepare ourselves.

Continue to invest without being misled by pessimism.

The Internet is already full of various news and views on the economy, financial markets, and stock market, and some of them are becoming conspicuous for their ability to confuse individual investors. Perhaps such pessimism will increase in the future as the markets become more turbulent. If people see or hear such articles when they are skeptical about their investments, they may stop investing. To prevent this, it is important to be prepared.

For those who are already investing in savings accounts through a savings NISA or other means, the right thing to do is to maintain the status quo. To begin with, asset management for individual investors should basically be based on the premise of long-term investment. In particular, when investing in indexes through savings, the investment period must be at least 15 or 20 years. Although it is not theoretically possible to say that “long-term investment will always yield a profit,” the risk-return ratio is more likely to be stable. The most important thing is to never stop investing.

It is not wise to “buy on a roll.”

Perhaps some of you may be thinking of using this decline as an opportunity to make additional purchases or increase the amount of your reserve. This is called “nan-pin buying” in the stock market, where you buy more stocks at a lower price to lower the average purchase price of your holdings and increase your profit when the price rises. This method is not recommended, unless you have a lot of money to spare. If the decline is longer than expected, the risk of having to stop investing increases.

A closer look at the inflow of funds into eMAXIS (S&P 500) shows that in December 2021, a record monthly inflow of 83.5 billion yen was recorded. The U.S. stock market had been in a strong recovery and the S&P 500 had been on a steady rise until then, but the amount of inflows began to decline as the market began to fall in 2022, and by May, when there were signs that the market had bottomed out, inflows had recovered to 70.7 billion yen. It is assumed that investors who saw that the bottom had fallen out of the market bought more and more. The unrealized losses of investors who increased their purchases at that time are now probably ballooning. It would be wise to maintain the amount of money accumulated at the current level.

Increase the Effect of Diversified Investment

If you have surplus funds and only invest in funds linked to the S&P 500, consider investing in funds linked to the TOPIX (Tokyo Stock Exchange Stock Price Index). For example, if you are investing 10,000 yen per month in “eMAXIS (S&P500),” you can start a separate TOPIX-linked fund of 3,000 yen per month. Although some may be reluctant to invest in Japan, which has become a low-growth country, it will certainly increase the effectiveness of diversification.

In fact, the S&P 500 is easily influenced by the price movements of some of its constituent stocks. When explaining the S&P 500 as a stock price index, it is often said that it “represents the entire U.S. stock market,” as mentioned at the beginning of this article. In fact, the total market capitalization of the S&P 500 accounts for about 80% of all stocks listed in the United States. However, the top five stocks in the S&P 500 account for about 20% of the total market capitalization. These five companies are Apple, Microsoft, Alphabet (Google), Amazon, and Tesla, and are easily influenced by the price movements of these stocks.

(Some estimates suggest that if GAFAM and Tesla are excluded from the S&P 500 over the 10-year period from 2010 to 2020, the performance of the S&P 500 will not differ significantly from that of the TOPIX.) (The performance of the S&P 500, excluding GAFAM and Tesla, is estimated to be much the same as the TOPIX over the next 10 years.

Weak Yen is a tailwind for U.S. equity investment

Finally, it is important to point out that the shock is mitigated by the weak yen: the S&P 500 is -23.4% from its high, while the NAV of “eMAXIS (S&P500)” (the price of the fund) is only -11.2%. The reason for this is that the S&P 500 has been in the red for the past several years. The reason for this is that the S&P 500 is calculated in US dollars, while “eMAXIS (S&P500)” is not “currency hedged” and is therefore calculated in yen. The significant depreciation of the yen since the beginning of the year has increased the value of the dollar and mitigated the decline in the S&P 500.

Not only “eMAXIS (S&P500)” but also other funds that invest in overseas stocks should have mitigated the decline somewhat as well if they are not currency hedged. This is the advantage of investing in overseas financial assets, and for domestic investors, it prevents to some extent the diminution of assets due to a weaker yen. However, it should be noted that if the yen appreciates in the future, the NAV will decline even if the S&P 500 does not fall.

It has long been said that the best way to make an investment last a long time is to forget that you are investing. I think this is probably the “best” way to continue investing as if nothing has happened. Although a lot of people will say, “I’m in trouble because I can never do that.”

  • Interview and text by Kenji Matsuoka

    After working as a money writer, financial planner, and market analyst for a securities company, Matsuoka became independent in 1996. He writes articles on finance and asset management mainly for business and economic magazines. Author of "Textbook for the First Year of Robo-Advisor Investing" and "Understanding with Rich Illustrations! A book that will definitely benefit you with cashless payment". He is also a credit card guide for the information site "All About.

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