In this briefing:
- Japan: Fortnightly Update – And So It Goes
- Historical TOPIX Inclusions: How Do They Do Around Inclusion Date?
- Lawson’s New Online Service Is Working, Doubles Coverage
- Small Potatoes Nikkei 225 Changes on Christmas Day
- Japan: The Long and the Short of It – Recommended Portfolios
1. Japan: Fortnightly Update – And So It Goes
AND SO IT GOES – After our eight-day 4.5% ‘Thanksgiving rally’, the market reverted to recent type and promptly fell 6.5% to Tuesday’s low, which is now likely to be surpassed on the downside this Monday. Although the market has yet to fall 20% from the January 23rd peak, the odds of Japan joining the growing list of global ‘bear’ markets are lengthening and, in US$-futures-terms, we are already there. Certainly, there is now clear ‘daylight’ between the 50-day and the 200-day moving average. However, a much wider spread is required before a clear ‘bottom’ is reached.
BoJ STEPS UP – The Bank of Japan’ market-support programme bought ETFs on six of the last ten trading days and should be active again on Monday. As the Bank is now constrained in its ability to buy JGBs by a lack of supply, the equity markets (via the ETF mechanism required to circumvent restrictions on direct equity investment) appear to offer more scope for quantitative easing, although the longer-term consequences of such a ‘nationalisation’ are far from positive.
Source: Japan Analytics
1,000 NEW LOWS – The current down cycle has already produced two days of 1000-day new 52-week lows. A ‘proper’ climactic ‘low’ requires over 1,500 on a single day or over 40% of listed stocks – an event that has occurred on only ten of the last 3,426 trading days. As can be seen above, such an event is, however, only the end of the beginning of a market recovery. For now, the question is – are we replaying 2008 or 2016?
McCLELLAN SUMMATION – Our preferred long-term advance-decline ratio, the McClellan Summation will reach a new three-year low this week, but should reach ‘oversold’ territory of below -4,000 by the end of January.
MARKET-IMPLIED GROWTH FORECAST – The Market Composite PER is now below 13x. Assuming a ‘normal’ earnings multiple of 16.7x, Mr Market is suggesting that Japanese corporate profits are due to fall by 22% on average to the level last reached in the first quarter of 2017, further implying declines of greater than 50% for some key ‘global’ sectors such as Autos, Machinery, Chemicals, Electrical Equipment and Technology Hardware, which together comprise one-third of aggregate Net Income.
OUTLOOK & RECOMMENDATIONS
- We continue to recommend an underweight position in Japan in global portfolios.
- The rate of the current equity market decline is well in advance of the underlying trends in the economy and corporate profits and appears to be anticipating an all-out trade war. As our title suggests and as ‘pure-pop-icon’ Nick Lowe sings – ‘But where it’s going no one knows’.
- In contrast to global trade trends, the domestic Japanese economy remains overheated, the rate of inflation continues to rise, and Japan is close to full employment. Under such conditions, the Bank of Japan would be expected to taper its monetary easing policy. However, global trends have prompted a delay in any such move until well into next year. In the near term, we continue to favour less-overbought domestically-orientated companies and look to accumulate better quality companies into any weakness in the coming month. For a list of recommendations, please see our recent Insight – Japan: The Long and the Short of It – Recommended Portfolios.
In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Kobe Bussan (3038 JP), Workman (7564 JP), Inpex (1605 JP) , Yaskawa Electric (6506 JP), Nidec (6594 JP), Keyence (6861 JP), and Nomura (8604 JP), Dentsu (4324 JP), and Sohgo Security Services Co (2331 JP).
2. Historical TOPIX Inclusions: How Do They Do Around Inclusion Date?
There are seven stocks which were promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December.
A couple are decently largecap. Most are smaller.
A good question to ask when looking at these stocks might be… What Really Happens Around TOPIX Inclusions?
Having traded them for much of the last 20yrs, I had my hypotheses, and had done studies over the years for my own purposes, but I had not done a study recently. To check my personal hypotheses I tested 340+ TOPIX inclusions over the past five years.
There are patterns to the history of trading these events which are worth a look. Some of the patterns are reasonably interesting.
3. Lawson’s New Online Service Is Working, Doubles Coverage
Lawson (2651 JP) Fresh Pick is the convenience store operator’s new e-commerce solution for food launched earlier this year, and replacing various other less successful experiments.
Unlike competing services, Lawson’s service is limited to just 600 SKUs (stock keeping units), all fresh foods, and Lawson offers no home delivery, only click-and-collect.
In the nine months since launch, the service has expanded from 200 to 1,200 stores, currently concentrated in west Tokyo and Kanagawa.
It is a model that will expand rapidly across the rest of the country because Lawson has to invest so little to make this happen.
4. Small Potatoes Nikkei 225 Changes on Christmas Day
Specialty steel maker Nisshin Steel (5413 JP) is slated to merge with parent company Nippon Steel & Sumitomo Metal (5401 JP) as of January 1, 2019. For that, Nisshin Steel will be delisted on December 26th (i.e. the last day of trading is the 25th) and that means the Nikkei Inc was obliged to choose a replacement to take Nisshin Steel’s place in the Nikkei 225 and other indices.
On December 11th, the Nikkei Inc announced Itoham Yonekyu Holdings Inc (2296 JP) would take Nisshin’s place in the Nikkei 500 Index, announced that Japan Post Holdings (6178 JP) would join the Nikkei 300 Index, and announced that Dic Corp (4631 JP) would replace Nisshin Steel in the Nikkei Stock Average, better known as the Nikkei 225.
The only one which matters is the Nikkei 225 (the other two have tiny tracking), and this is not a huge index trade as both Nisshin Steel and DIC are deemed 500 yen par value stocks.
This is an event one could “miss.”
And it will happen on Christmas Day, after a long weekend for Japan traders.
5. Japan: The Long and the Short of It – Recommended Portfolios
THE LONG AND THE SHORT OF IT – Readers of our earlier Insights will be familiar with our scoring and ranking methodologies that cover corporate results and forecasts as well as our relative price and relative volume series that identify stocks as ‘Overbought’, ‘Oversold’ and ‘Overtraded’. We have also introduced our residual income-based valuation model which we have now extended to all quarterly and annual periods for all currently listed companies. Following some requests, we have incorporated much of the above as well as more traditional factors into a scoring model that ranks all companies by relative attractiveness. This insight presents the top and bottom 100 companies as portfolio recommendations.
IMPLIED SECTOR & PEER GROUP RELATIVE WEIGHTS – The implied sector deviations incorporating all ‘long’ and ‘short’ recommendations at equal 1% weights are as below. The largest implied ‘Overweights’ are in Information Technology, Retail, Technology Hardware, Media and Non-Bank Finance, and the largest ‘Underweights’ are in Healthcare, Autos, Food, Beverages & Tobacco, Other Consumer Products, and Transportation & Logistics. The top five Peer Group implied relative weights are IT System Services, Machine Tools, Retail – Food & Drink, Retail Drugstores and PCs & Computer Peripherals and the bottom five are Pharmaceuticals, Motor Vehicles, Personal Products, Medical & Dental Equipment, and Railways.
LONG & SHORT RECOMMENDATIONS – In the DETAIL section below, recommendations are grouped into fifty ‘longs’ and fifty ‘shorts’, with additional fifty-strong ‘second divisions’ for each. In the tables below, we rank companies in descending order of attractiveness/unattractiveness. The tables presented cover a universe of the largest 771 Japanese companies – those having a current market capitalisation (excluding Treasury Stock) more than ¥100b. For clarity, we show only a selection of factors. All data is as of the close on Friday 14th December.
