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Abe Bliss Broken as Foreigners Flee Topix in Biggest Drop

By Yoshiaki Nohara, Yuko Takeo and Toshiro Hasegawa
March 31, 2014 2:44 AM EDT 12 Comments
Visitors look at the trading floor of the Tokyo Stock Exchange. Japan’s Topix index, up 51 percent last year, has fallen 8.9 percent in the three months since, almost twice as much as the next-worst market, Hong Kong.
Photographer: Junko Kimura/Bloomberg
Visitors look at the trading floor of the Tokyo Stock Exchange. Japan’s Topix index, up 51 percent last year, has fallen 8.9 percent in the three months since, almost twice as much as the next-worst market, Hong Kong.

In just one quarter, the developed world’s biggest stock rally has given way to its worst slump.

Japan’s Topix index, up 51 percent last year, fell 8.9 percent this quarter through March 28, almost twice as much as the next-worst market, Hong Kong. The retreat is emboldening short sellers, whose trades made up as much as 36 percent of daily Tokyo Stock Exchange volume this month. Foreign investors sold 975 billion yen ($9.5 billion) of Japanese shares in one week in March, the most since the crash of 1987.

While equities struggled around the world in the first quarter, declines were worse in Japan, where the euphoria created by Prime Minister Shinzo Abe and the central bank’s steps to beat deflation showed signs of wearing off. An appreciating yen and concern about tomorrow’s sales-tax increase punished shares more than the rest of the world at a time when China’s slowdown, Russia’s annexation of Crimea and worry that the U.S. will raise interest rates sooner than anticipated made gains harder to come by.

“This situation is unfortunate and saddening,” Hisashi Iwama, a senior portfolio manager who helps oversee 12.7 trillion yen at Diam Co., said by phone on March 26. “I’d expected stocks to remain level during the first half of this year.”

Developed markets went nowhere in the last three months, with equities tracked by the 23-country MSCI World Index rising 0.2 percent after posting gains averaging 6.1 percent in five of the last six quarters. Concern the Federal Reserve’s reduction of stimulus will curb the global recovery and projections that China will post its slowest economic growth in 24 years halted an advance that added $9.6 trillion to worldwide share values in 2013.

Paring Loss

The Topix rose 3.5 percent last week to pare its loss this quarter to 8.9 percent. The gauge advanced 1.4 percent today in Tokyo, climbing for a sixth day, while data showed industrial production unexpectedly fell in February.

Stocks in the MSCI World Index added 0.5 percent last week. The Standard & Poor’s 500 Index (SPX), whose 30 percent gain in 2013 was its biggest in 16 years, lost 0.5 percent the past five days and has advanced 0.5 percent since December.

“It’s been a period of digestion and a period of decelerating growth,” Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $150 billion, said in a March 28 phone interview. “There’s a market sentiment shift as portfolio managers move away from investing in the high flyers of 2013. It shouldn’t be a shock to anyone that the equity markets are flat-lining.’

Last Year

This time last year, the Topix was posting its second straight quarterly increase of more than 16 percent as Abe enacted his revival strategy and the yen plunged. Stocks were about to receive another boost from the Bank of Japan’s unprecedented easing program, unveiled a year ago this week. The Topix ended 2013 at its highest close since July 2008.

Foreign asset managers who rushed into Japan as shares surged are now heading out. They’ve yanked more than $21 billion out of the nation’s equities this year, according to the Ministry of Finance. Almost $155 billion flowed into the market from overseas last year, the most on record.

Hitachi Zosen Corp. plunged 41 percent to lead declines on the Nikkei 225 Stock Average (NKY) this year through last week. The Osaka-based maker of ships and garbage incinerators cut its full-year net income forecast by 60 percent in February, saying it expected profitability to decline in its plant and machinery businesses. Nisshin Steel Holdings Co. fell 29 percent, as did bearing maker NTN Corp., for the next biggest Nikkei 225 losses.

Black Monday

Overseas investors sold 975 billion yen of Japanese stocks in the week ended March 14, the most on record after 1.12 trillion yen following the ‘‘Black Monday” stock-market crash in 1987, data from the Tokyo Stock Exchange show. Investors have withdrawn $243.1 million in March from U.S. exchange-traded funds tracking Japan, the first outflow since August, according to data compiled by Bloomberg.

“Since the start of 2013 the market has essentially been taken over by large macro hedge funds who basically want big momentum trades,” said Jonathan Allum, an equity strategist at SMBC Nikko Capital Markets Ltd. in London, who remains positive on Japanese shares. “Momentum works in both directions,” he said. Also, “the sad and basic truth is Japan has become an adjunct of the currency market.”

The yen has gained 2.4 percent against the dollar this quarter, the biggest advance since the three months ended June 2012, weighing on the outlook for Japanese exporters. Demand for the currency as a haven surged and global stocks were buffeted by Chinese data on exports, manufacturing and credit growth that missed estimates, signaling the world’s second-biggest economy may struggle to achieve its 7.5 percent growth target for 2014.

Slow Progress

Progress has been slow on Abe’s so-called third-arrow package of policies to boost growth. Investors are waiting for lower corporate taxes, looser labor laws and Japan to join the Trans-Pacific Partnership trade agreement. The premier will unveil a revised growth strategy in June.

JPMorgan Asset Management Ltd., which oversees $1.5 trillion, is buying more Japanese stocks, figuring Abe will restore investors’ faith.

“The hope is still there,” Grace Tam, a Hong Kong-based global market strategist at JPMorgan Asset, said by phone on March 26. “It’s just hope, rather than us having any evidence they’re going to enact reforms. If they can’t, people will lose confidence in Japan, so they better do something.”

Economic Contraction

Gross domestic product gained 0.7 percent on an annualized basis in the three months ended in December, a quarter of the pace initially expected by strategists. The economy is projected to contract an annualized 3.5 percent in the three months starting April, according to the median forecast of 28 firms surveyed by Bloomberg, after Japan raises its sales tax to 8 percent from 5 percent tomorrow.

The last time Japan increased the consumption levy, in 1997, the economy fell into recession. The government has designed a 5.5 trillion yen stimulus package to counter the expected decline in consumer spending, and is holding off on a decision to increase the tax further to 10 percent starting next year.

“Abe and his cabinet are trying hard to breathe life into the Japanese economy, but this is easier said than done,” Peter Elston, Singapore-based head of Asia-Pacific strategy and asset allocation at Aberdeen Asset Management Plc, which oversees about $320.6 billion. “High expectations that had been built into the Japanese equity market a year or so ago are not being met, as evidenced by the poor fourth-quarter GDP data.”

More Nervous

Almost one in five economists surveyed by Bloomberg in January expected the BOJ to add to stimulus in the first quarter. In the latest poll, 35 percent say it will come in the next. The bank buys about 7 trillion yen of bonds a month.

“More investors are nervous about the risk of the sales-tax increase than I had expected,” said Gentoku Kiyokawa, Tokyo-based director of the investment management department at BNP Paribas Investment Partners, which oversees the equivalent of $662 billion. “Plus, I thought the BOJ would move between January and March, but it didn’t.”

Investors staying the course point to corporate earnings, equity valuations and the outlook for the currency as signals the market is poised to rebound. Analysts surveyed by Bloomberg forecast the yen to weaken to 105 per dollar by June 30 and 110 by the end of the year.

Higher Earnings

Profits for Topix companies beat expectations last quarter, led by Toyota Motor Corp., which quadrupled quarterly net income. Earnings per share for companies on the Topix will advance 21 percent in the fiscal year ending March 2015, according to Goldman Sachs.

The Japanese gauge traded at 14.2 times estimated earnings as of March 28, compared with 15.9 for the S&P 500 and 14.4 for the Stoxx Europe 600 Index, according to data compiled by Bloomberg. The Topix remains 59 percent below a 1989 high.

“Japan is the only major market globally that is still enjoying upward earnings revisions,” said Kathy Matsui, chief equity strategist for Japan at Goldman Sachs Group Inc.

Goldman Sachs, which raised its Topix target six times last year, cut its three- and six-month forecasts on March 20. It maintained a 12-month target of 1,450. The Topix closed at 1,186.52 last week.

Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co., still isn’t convinced.

“The market is likely to keep weakening if policy makers do nothing,” said Seshimo, whose firm oversees about 82 billion yen. “Disappointment over Abenomics is getting bigger and bigger. The talk ultimately didn’t translate into action.”

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Yuko Takeo in Tokyo at ytakeo2@bloomberg.net; Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net

To contact the editors responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net Tom Redmond

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