Northlake clients have owned a position in Japan via the iShares MSCI Japan Index (EWJ) for over two years. Until yesterday that is. At the open, I sold the entire position. My opinion that Japan is exiting a multi-decade economic and stock market slump has not changed. Rather, with the market having been so strong, seasonals turning negative, and most client accounts being fully invested, I felt it was prudent to raise some cash.
With Disney (DIS) pending after the close, all of the individual stocks held by Northlake clients have reported outstanding quarterly earnings and guidance was either increased or a bias for higher guidance was implied (see my recent coverage of earnings calls for AAPL, CETV, NIHD, RG, and RGC). With increased confidence in the outlook for these stocks and their ability to bounce back from any market related weakness, I feel that clients are in good shape holding these positions even as I desire to raise cash. Away from individual stocks, other client holdings were EWJ and the money dedicated to Northlake’s Market Cap and Style models. The allocation toward the models is permanent as part of a relative performance strategy, so that left me with Japan as a possible sale….

Three things convinced me to pull the trigger and sell. First, Japan has been sharply lagging the global market rally. This makes me concerned that if the global rally entered a pullback, Japan would lead to the downside. Second, when I thought about why Japan has been lagging I realized that it was due to the risk of slowing US economic growth and its impact on the country’s export driven economy. In my view, the primary risk to US stocks is that the economy slows further and faster than the consensus expects. I don’t know if that will happen but if it does, it reinforces my view that EWJ was a good place to raise cash. Finally, another meaningful risk to the stock market is China. As we saw in February, global markets are very sensitive to dislocations in China. Japan’s turnaround has been significantly aided by its exposure to China and if another hiccup were to occur Japanese stocks would likely suffer relatively more damage.
Client cash positions now average about 10% which is in the middle of the 3-15% range I use in most client accounts. Given how far the market has come, I thought it was time to ring the register and take some gains. Given my view on what might lead the market to suffer a sharp pullback, EWJ seemed like the best choice for raising cash.