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Soros makes another billion

The Aussie dollar hit a four-and-a-half year high against the Japanese Yen last week on the back of the massive stimulus announced by the Bank of Japan (BOY).

With the Japanese economy grinding down in a deflationary spiral since the 1990s, plans to pump around A$650 billion into its economy are a significant attempt to kick-start some inflation. The stimulus package is huge, being roughly the same size as the US Federal Reserve’s quantitative easing manoeuvres, yet the Japanese economy is only about one-third the size of the USA’s economy. On the back of this move the 10-year government-bond rate has dropped to just 0.425%.

Canny 82-year-old investor George Soros, a hedge fund manager who famously made a $1 billion profit when he shorted the British Pound in 1992, has reportedly repeated history by shorting the Yen on expectations that the BOJ would devalue, netting himself a $1 billion profit since November 2012. While Soros has been making money on the short trade, he has also positioned his portfolio on the long side in Japanese stocks that should perform well from a weaker currency.

Reports suggest he now has around 15% of his fund’s assets in Japanese equities. Soros hasn’t been alone in front-running the BOJ. Other highly regarded fund managers including David Einhorn, Daniel Loeb and Kyle Bass are also believed to have been short the Yen and profited handsomely from the 24% fall against the USD in the last six months.

While the stimulus has been great for savvy hedge fund managers there are fears that the BOJ’s actions could stoke a currency war as nations move to weaken their currencies to stay competitive. There are expectations that the Bank of England will soon move to devalue further as well. A second fear, highlighted by Soros in a recent interview, is that the aggressive easing by BOJ could lead to a collapse in the Yen should Japanese citizens decide it is too risky to hold Yen and instead move their money offshore.

Locally, two fund managers who should benefit from a reinvigorated Japanese economy include Platinum Asset Management’s (ASX: PTM) Japan Fund and International Fund. The funds have significantly outperformed their benchmark over the long term and the December quarterly report showed that portfolio manager Kerr Neilsen has increased the exposure to Japanese companies that will benefit from a weaker Yen. Kerr’s March commentary will be particularly interesting as he reflects on the changed dynamics of investment opportunities in Japan. BT Investment Management (ASX: BTT) also offers exposure to the Japanese economy through the BT Wholesale Japanese Share Fund.

Foolish takeaway

Currency trading can be risky and is generally best left to the investment banks and hedge fund. Investors are better served by focussing on their circle of competence within equity markets, rather than jumping into the complex foreign exchange world of bips, spreads and cross-rates.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur owns shares in BT Investment Management.

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