The Topix index is trading at the lowest level relative to the S&P 500 since Prime Minister Shinzo Abe took office near the end of 2012, highlighting ebbing enthusiasm for Japanese stocks among overseas investors, according to Mizuho Securities Co.
The relative gauge dropped to 0.557 on Wednesday, as the US benchmark gained after Japanese stocks fell. The S&P 500 is up 15% so far in 2019, double the Topix’s gain. Foreigners unloaded a net ¥2.5tn ($22.5bn) of Japanese cash equities in the first three months of the year after dumping ¥5.7tn last year, the most since 1987.
“This Abenomics low shows that Japanese stocks have lost their appeal relative to the US market,” Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo, wrote in a report dated April 10. The tide of enthusiastic buying by foreigners seen during the Abenomics bull run has ebbed since 2018, he said.
Japanese stocks ranked in the top six performers out of 94 primary global equity indexes in 2013, with the Topix surging 51%. That was the year Abe encouraged overseas investors to “buy my Abenomics” in a speech at the New York Stock Exchange. The benchmark gauge continued to climb after that but stalled after reaching a 26-year high in January 2018.
The recent sluggishness has allowed Hong Kong’s equity market to overtake Japan’s as the world’s third-largest in value, behind the US and mainland China. Hong Kong’s market cap was $5.78tn as of Wednesday, compared with $5.74tn for Japan, according to data compiled by Bloomberg.
There’s more to it than the global shift in focus toward China over the past decade or two. Mizuho’s Ueno said a lack of government action on demographics has left Japan with diminished growth prospects over the medium to long term, reducing appetite for Japanese stocks among foreigners. Also, local companies are increasingly reliant on overseas markets for profits, which has made them more vulnerable in periods of yen appreciation, he added.
In addition, the Bank of Japan’s massive purchases of exchange-traded funds tracking Japanese shares have distorted share price formation, Ueno said. The BoJ has bought a total of ¥25tn of ETFs since it started the program in 2010.
Despite the boost from its large domestic benefactor, the Topix is still trading at 12.4 times estimated 12-month forward earnings versus 16.8 times for the S&P 500. The Japanese gauge fell for a fourth-straight day yesterday, as stocks have been pressured this week by negative earnings from retailers including Nitori Holdings Co and Ryohin Keikaku Co as well as a trade group report that machine tool orders declined for a sixth-consecutive month.
Tomochika Kitaoka, chief equity strategist with Citigroup Global Markets Japan Inc, said in a note that long-term investors remain on the sidelines even though Japanese equities aren’t overheated. As evidence he pointed to factors including a decline in net long arbitrage and margin positions as well as recent weakness in larger high beta stocks.
“Many Japanese equity indicators point to caution,” Kitaoka said. “Share prices are tending to react adversely to negative results information, and the U-shaped recovery pointed to by March machine-tool orders is a reason for near-term caution regarding cyclicals.”