Q: You have mentioned Japan increase in interest rates (just announced this morning at 25 bps) and carry over trade as one of certain key risks for 2026. Is purchasing VIU the wrong investment decision with such risk on the immediate horizon? VIU has Japan as top geographic holding at 24%.
5i Research Answer:
It is a risk, but it is not an 'unknown' risk, so markets are at least partially priced in for a possible event. But it is hard to gauge how sentiment and panic can develop, A carry trade unwinding could see some high volatility if algorithmic trading kicks in and investors subsequently panic. But we would still be OK with VIU, on the assumption that it exists in an otherwise well-diversified portfolio and the position is not huge. i.e. a 10% VIU position implies a 2.4% Japan weighting overall. Note if there is a market correction, no equity market will be spared, at least for any initial decline. For investors concerned here, shifting some overall portfolio exposure to more bonds or cash is likely a better strategy as a hedge.