The diverging performance of Japan's benchmark Nikkei stock average and the broader Topix is a reminder that corporate Japan is not all equally riding the wave of optimism sparked by "Abenomics" yet. Prime Minister Shinzo Abe's mix of super-loose monetary policy and reforms have fuelled confidence in economic recovery since he came to power in late 2012.
The Nikkei index of 225 bellwether names rose to 18-1/2-year highs in June due mainly to gains in big-name exporters. But the Topix index consisting of nearly 1,900 companies has not even reached its 2007 peak, as banks and modest-sized firms that rely more on domestic consumption struggle to boost earnings. "You can't judge how corporate Japan is doing by just looking at the Nikkei's performance," said Yasuo Sakuma, portfolio manager at Bayview Asset Management.
"The picture you see through the Nikkei and the one you see through the Topix are quite different. It reflects the reality that not every company has the blessings of Abenomics." With inclusion of many domestically-focused and consumer-driven stocks, the Topix is likely to struggle to close the gap with the Nikkei, which has a heavy weighting in a handful of bluechips, even as the economy gains traction. The Nikkei soared as investors poured money into exporters in the belief that a weaker yen will make them more profitable, companies that have expanded overseas or those able to capture overseas demand through inbound tourism.
In contrast, the Topix includes many smaller non-exporters which rely on domestic demand for growth. Abe's policies have yet to strongly revive consumption as wages have remained stagnant. The Topix consists of all firms that are listed in the first section on the Tokyo Stock Exchange, so all the Nikkei companies are also included in the Topix. Financial stocks account for 14 percent of the Topix while they account for only 3 percent of the Nikkei.
Both markets have posted big gains in absolute terms since Abe launched his aggressive stimulus programme, with the Nikkei getting a boost from foreign inflows. Global equity funds buy mainly big companies or an index when increasing their exposure to a country rather than picking up individual shares after analysing each company. "While there are many factors behind the Nikkei's outperformance, one thing that is certain is that the type of investors who buy Japanese shares is changing," said Tomohiro Okawa, equity strategist at UBS Securities.
"Until recently, global equity funds weren't in Japan. But now more and more are coming to Japan, buying only large caps, so that helps the Nikkei more," he said. The Nikkei has surged 136 percent since the Abenomics rally started in late 2012, while the Topix gained 128 percent. The Nikkei recently surpassed its peak hit during the dot-com bubble in 2000 to its highest level in more than 18 years. In contrast, the Topix is still below its peaks of 2007 and 2000.
About 40 percent of the shares on the Topix have a price-to-book ratio below one, meaning they trade below book value and have a market capitalisation below their net worth. This happens when the market has poor expectations of earnings. Fewer than 20 percent of companies on the Nikkei, by contrast, trade below a price-to-book ratio of 1. Fund managers also note that among the Nikkei's top gainers are companies that have expanded overseas, such as air conditioner maker Daikin, Uniqlo clothing seller Fast Retailing and tire maker Bridgestone.
Shares in Daikin, which acquired Goodman Manufacturing to gain a foothold in the US market in 2012, have quadrupled. The heaviest-weighted Nikkei component Fast Retailing, which accounts for 11 percent, has been rewarded for its aggressive overseas expansion with a tripling in share price, while Bridgestone, which draws 80 percent of its revenue abroad, has risen 160 percent. "These days investors tend to cheer share buybacks. But if you look at long-term performance, the key is investment for long-term growth," said Bayview's Sakuma.
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