REFILE-HOW TO PLAY IT-Despite hot stock market, you should avoid Japan

Thu May 23, 2013 9:11am EDT
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By David Randall

NEW YORK May 23 (Reuters) - Japan's white-hot stock market has investors crowding in, but there are a few reasons why you shouldn't follow the pack.

It's a temptation, of course. The benchmark Nikkei 225 index is up 50 percent for the year, more than any other developed market, and nearly triple the approximate 17 percent gain for the Standard & Poor's 500 stock index through May 21.

This streak prompted investors to put a net $9.1 billion into Japan equity funds and exchange-traded funds in April. In fact, that's the bulk of the $9.9 billion investors added to all sector funds during the same month, according to Lipper data.

Yet investors might already hold more of Japan in their portfolio than they think. The average international mutual fund has 17.1 percent of its assets invested in the country, or nearly a fifth of the fund's portfolio, according to Lipper, a unit of Thomson Reuters Corp.

Adding a Japan-only stock fund or ETF on top of that at a time when the market has already seen big gains might set the stage for larger losses once the market cools, analysts said.

The Japanese economy grew at an annualized 3.5 percent in the first quarter.

"People are clearly thinking that the monetary policy Japan has put into place has at least the likelihood of turning the economy around," said Kate Warne, market strategist at Edward Jones. "But expectations have run a bit ahead of reality."   Continued...