Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Thematic (Sector/Industry)

A Bloomberg story this past week titled "A $35 Billion Selloff Is Pulling Down Japan's Stock Market" (<a href="https://www.bloomberg.com/news/articles/2018-08-28/a-35-billion-exodus-is-pulling-down-the-japanese-stock-market" target="_blank">link</a>) got tweeted into my Twitter timeline so many times, I finally had to read it. And this is the umpteenth time I find myself in the spot of almost needing to respond to provide a little more appropriately nuanced coverage of the issue.
<blockquote>
It’s shaping up to be the biggest exodus in more than three decades. Foreigners have dumped a net 3.9 trillion yen ($34.7 billion) in Japanese equities so far this year, according to data from Japan Exchange Group Inc. that runs through Aug. 17. That’s on course to be the largest annual selloff since 1987, the year of Wall Street’s famous Black Monday market crash.
</blockquote>
This quote which forms the lede may be arithmetically true. But so are a lot of things. If my consumption of Chinese flat peaches accelerates over the next year as it has in the last two days, in a year's time I will be averaging several a minute. If it continues to rain like it has in Hong Kong this week, it will never stop raining. Ever. And I mean ever. 
The problem, of course, is that markets do not always decide that the start of a trend is January 1. The largest buying sprees and sellathons by foreign investors do not normally align themselves with the calendar. I do not have data going back to 1987, but I have data going back to 1994 (25yrs) and while the current run of net selling by foreigners is significant, it is not overwhelming.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/062/376/original/Screen%20Shot%202018-09-01%20at%203.49.18%20PM.png?1535788234" class="editor-image img-responsive" data-smartkarma-image-id="62376"></figure>
<div style="text-align: left;" class="content-caption">data sources: JPX, TSE, MOF, TL, Bloomberg</div>
It just so happens that the last two really big selloffs in dollar terms (both exceeding ¥6trln on a rolling 52wk basis) did not happen to see their starting points and end points coincide with those of the Gregorian calendar.
The end of the article discusses a "stealth tapering" saying the BOJ has slowed purchases of ETFs this year. This, strictly speaking is NOT true. I addressed this issue in <a href="https://www.smartkarma.com/insights/japan-passive-boj-tapering-etf-buys-not-so-fast" target="_blank" data-smartkarma-citation="insights:23457">JAPAN PASSIVE:  BOJ Tapering ETF Buys? Not So Fast</a> last week as part of the "JAPAN PASSIVE" <a href="https://www.smartkarma.com/search?q=%22JAPAN%20PASSIVE%22&amp;sort=published-at&amp;type=insights" target="_blank">series</a> of insights. The 6mo average of ETF buying is at a run-rate of exactly ¥6trln which is the target (¥5.7trln of "regular" ETFs and ¥300bn of 'special' ETFs). The black line is the policy rate. The 3-month and 6-month averages are the thicker blue lines. The thinnest blue line is the 1mo average run-rate. That has dropped, but so be it - it oscillates around the longer-term averages as shorter-term averages always do.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/062/377/original/20180826_BOJETFBuying_DownDays%20v2.png?1535788752" class="editor-image img-responsive" data-smartkarma-image-id="62377"></figure>
<div style="text-align: left;" class="content-caption">data sources: BOJ, TSE, JPX, Bloomberg</div>
The important issue here is that the BOJ's ¥6trln run-rate would have bought ¥4trln of ETFs through end-August and the BOJ has bought ¥3.88trln instead. Seeing an oscillator drop below its mid-point does not, in my mind, indicate "tapering." It is just an oscillator.
Companies have also been buying back their stock. At a rate similar to foreign selling. So somehow, someone ELSE has been selling just as much as foreigners, but they do not get a mention.
<div class="content-highlight">
Because of the noise, I decided to dust off the long-term analytics on Japan investor class flows, and present them here again. Because flows net off to close to zero (i.e. there are a certain number of shares, and if some investor class is a net seller, other investor classes must be net buyer(s)), deriving a model for behavior is useful. 
Long ago, in roles in fixed income and equity derivatives strategy, I built models of net foreign buying, and they uniformly showed that foreign investors chase/push/drive performance. My final model is a multi-input model which provides a simple combination of two factors they chase.
This insight discusses those behavior models, investor class flow dynamics, cycles, and trends and pressures near-term.
The combination of the investor class flows, and the model which drives net foreign activity, is interesting. I think it helps because the top-down aspect matters for understanding allocation flow.
</div>
Read on for the nitty gritty (as usual, we start with Conclusions First).

A Bloomberg story this past week titled "A $35 Billion Selloff Is Pulling Down Japan's Stock Market" (link) got tweeted into my Twitter timeline so many times, I finally had to read it. And this is the umpteenth time I find myself in the spot of almost needing to respond to provide a little more appropriately nuanced coverage of the issue.

It’s shaping up to be the biggest exodus in more than three decades. Foreigners have dumped a net 3.9 trillion yen ($34.7 billion) in Japanese equities so far this year, according to data from Japan Exchange Group Inc. that runs through Aug. 17. That’s on course to be the largest annual selloff since 1987, the year of Wall Street’s famous Black Monday market crash.

This quote which forms the lede may be arithmetically true. But so are a lot of things. If my consumption of Chinese flat peaches accelerates over the next year as it has in the last two days, in a year's time I will be averaging several a minute. If it continues to rain like it has in Hong Kong this week, it will never stop raining. Ever. And I mean ever. 
The problem, of course, is that markets do not always decide that the start of a trend is January 1. The largest buying sprees and sellathons by foreign investors do not normally align themselves with the calendar. I do not have data going back to 1987, but I have data going back to 1994 (25yrs) and while the current run of net selling by foreigners is significant, it is not overwhelming.

data sources: JPX, TSE, MOF, TL, Bloomberg
It just so happens that the last two really big selloffs in dollar terms (both exceeding ¥6trln on a rolling 52wk basis) did not happen to see their starting points and end points coincide with those of the Gregorian calendar.
The end of the article discusses a "stealth tapering" saying the BOJ has slowed purchases of ETFs this year. This, strictly speaking is NOT true. I addressed this issue in JAPAN PASSIVE:  BOJ Tapering ETF Buys? Not So Fast last week as part of the "JAPAN PASSIVE" series of insights. The 6mo average of ETF buying is at a run-rate of exactly ¥6trln which is the target (¥5.7trln of "regular" ETFs and ¥300bn of 'special' ETFs). The black line is the policy rate. The 3-month and 6-month averages are the thicker blue lines. The thinnest blue line is the 1mo average run-rate. That has dropped, but so be it - it oscillates around the longer-term averages as shorter-term averages always do.

data sources: BOJ, TSE, JPX, Bloomberg
The important issue here is that the BOJ's ¥6trln run-rate would have bought ¥4trln of ETFs through end-August and the BOJ has bought ¥3.88trln instead. Seeing an oscillator drop below its mid-point does not, in my mind, indicate "tapering." It is just an oscillator.
Companies have also been buying back their stock. At a rate similar to foreign selling. So somehow, someone ELSE has been selling just as much as foreigners, but they do not get a mention.

Because of the noise, I decided to dust off the long-term analytics on Japan investor class flows, and present them here again. Because flows net off to close to zero (i.e. there are a certain number of shares, and if some investor class is a net seller, other investor classes must be net buyer(s)), deriving a model for behavior is useful. 
Long ago, in roles in fixed income and equity derivatives strategy, I built models of net foreign buying, and they uniformly showed that foreign investors chase/push/drive performance. My final model is a multi-input model which provides a simple combination of two factors they chase.
This insight discusses those behavior models, investor class flow dynamics, cycles, and trends and pressures near-term.
The combination of the investor class flows, and the model which drives net foreign activity, is interesting. I think it helps because the top-down aspect matters for understanding allocation flow.

Read on for the nitty gritty (as usual, we start with Conclusions First).

JAPAN FLOW Redux : Foreign Investor Flows (Still) Matter, and They Are (Still) Cyclical

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/034/original/2018-08-16_19-07-34.png?1534672507" class="editor-image img-responsive" data-smartkarma-image-id="61034"></figure><div class="content-caption">Source: Japan Analytics</div>A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our '<a href="https://www.smartkarma.com/insights/japan-most-overbought-most-oversold-the-relative-price-score" target="_blank" data-smartkarma-citation="insights:21149">Nifty 50</a>' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.<div class="content-highlight">MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.</div>SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post [6178 JP</a>]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.<div class="content-highlight">
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
</div>SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.<div class="content-highlight">
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
</div>TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/038/original/2018-08-19_19-33-03.png?1534674804" class="editor-image img-responsive" data-smartkarma-image-id="61038"></figure>

Source: Japan AnalyticsA GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in earnings.  However, the score has only declined by 31 basis points since last quarter showing a degree of 'stability' seen only in 2011 in recent years.  The aggregate Forecast/Revision score has also continued to decline and is now lower for the fourth straight month. As would be expected, this score is a reliable leading indicator for the Results Score and suggests further weakening in the rate of earnings growth in the months ahead.  Neither score is, as yet, suggesting a decline in earnings before the end of the fiscal year.YEN CORRELATION WEAKENING - This quarter's earnings' stability was surprising given the relative strength of the Yen compared to a year ago. In the past and even as recently as 2016, a 5 per cent year-on-year decline has resulted in negative Results Scores. The year-on-year change in now positive so any negative impact will dissipate over the next two quarters.MARKET FOLLOWS MOMENTUM LOWER - The All Market Composite peaked on 23rd January and has since fallen by 11% despite a continuation of the Bank of Japan's ETF purchasing programme. Weakening earnings momentum and the overvaluation of many of the leading stocks, as in our 'Nifty 50' portfolio, have been contributing factors. With prospects for a much weaker Yen limited by the current trade negotiations between Japan and the United States, and with global growth slowing, we expect both Results and Revision Scores to trend lower, but to end the fiscal year in positive territory. Historically, the market has not risen during periods when both the Results and Forecast/Revision Scores have been trending down.MARKET RECOMMENDATION - Within a global portfolio, we would market-weight Japanese equities with a bias towards domestic sectors and not hedge the currency exposure.SECTOR RESULTS SCORES -The good news is that only one sector, (Multi-Industry - 75% of which is Japan Post [6178 JP]) has a negative score - and its score is less negative than last quarter. Both the Media and Consumer Services sectors' scores turned positive and each increased by more than two points.  On the other hand, over half of our 29 sectors saw declining scores, although the number was lower than last quarter.  The top sectors in terms of quarter-on-quarter change were Energy, Consumer Services, Media, Information Technology and Other Commercial Products while the laggards were Non-Bank Finance, Chemicals, Construction, Machinery and Utilities. SECTOR REVISION SCORES - Five sectors have negative Forecast/Revision Scores with Utilities now joining Media, Multi-Industry, Autos and Banks from last quarter. The highest scores are in the Energy, Technology Hardware, Electrical Equipment, Retail and Information Technology sectors. Improvements of greater than one point were seen in Energy, Media and Machinery while Food, Beverages &amp; Tobacco, Chemicals, Utilities, Other Materials and Technology Hardware all lost more than one point. Overall eighteen sectors saw declines.REVISION V. RESULTS SCORES - The difference between the Results and Revision Scores is a good indicator of corporate expectations compared with the trailing-twelve-month reality. In some cases (e.g. Restaurants) the 'optimism' is due to a failure to revise forecasts in the light of weaker results. In others, such as Telecommunications, there is scope for upward revisions in the coming quarters.
THE OPTIMISTS
Restaurants • Other Materials • Electrical Equipment • Technology Hardware • Retail
THE PESSIMISTS
Banks • Autos • Telecommunications • Utilities • Media • Chemicals
SECTOR PERFORMANCE - Over the last three months, our Japan Market Composite declined by 5.8%. Only four sectors saw an increase in value led by Telecommunications, Energy, Commercial Services and Information Technology. The largest declines were in the Building Materials, Metals, Real Estate Construction and Machinery sectors. Nine sectors are now negative over one year led by Building Materials, Metals and Food, Beverages &amp; Tobacco and only eight are up in double-digits led by Services and Information Technology. For the time being, Domestic Non-Manufacturing sectors 'rules the roost' and Domestic Cyclical sectors have taken over from Global Cyclicals in the 'doghouse'.'.
SECTOR RECOMMENDATIONS
Our most-preferred sectors are currently Energy, Healthcare, Telecommunications, Other Commercial Products and Information Technology.
Least-preferred sectors are Metals, Chemicals, Machinery, Autos, Construction, Real Estate, Building Materials, Food Beverages &amp; Tobacco and Utilities.
TOP 5 LARGER PEER GROUPS - The top five Peer Groups capitalised at over ¥1 trillion are Machine Tools &amp; Presses, PC &amp; Computer Peripherals, Oil &amp; Gas Refining &amp; Marketing, Telecom Distribution Services and Sporting &amp; Outdoor Goods. The top twenty larger Peer Groups have gained 16% over one year but have declined by 4% on average the last three months.BOTTOM 5 LARGER PEER GROUPS - The bottom five Peer Groups capitalised at over ¥1 trillion are Audio/Visual Content, LCD/LED Materials &amp; Equipment, Electrical Engineering, General Contractors and Real Estate - Leasing. The bottom twenty larger Peer Groups have lost 2% over one year and 9% over the last three months. Only Security Services and Tobacco have risen since May.

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Kokusai Electric  / Equity Capital Markets

<ul>
<li>KKR is looking to raise around US$960m through an accelerated secondary offering for around 10% of <a href="https://www.smartkarma.com/entities/kokusai-electric-corp" target="_blank" data-smartkarma-citation="entities:40152:1" rel="noopener">Kokusai Electric (6525 JP)</a>’s (KE) stock.</li>
<li>KE had seen a number of selldowns in the past from KKR and Applied Materials, with mixed results.</li>
<li>In this note, we will talk about the placement and run the deal through our ECM framework.</li>
</ul>


KKR is looking to raise around US$960m through an accelerated secondary offering for around 10% of Kokusai Electric (6525 JP)’s (KE) stock.
KE had seen a number of selldowns in the past from KKR and Applied Materials, with mixed results.
In this note, we will talk about the placement and run the deal through our ECM framework.


Aequitas: Kokusai Electric Placement - Past Deals Have Been Mixed but Its a US$1bn Cleanup

CYCLICAL SECTORS RALLY WITH THE MARKET - Japanese equities have rallied 3.6% over the last two weeks, and the market composite is now flat since the end of April. Mean reversion was widespread and the range from worst to best three-month change narrowed from 22.5% to 18.1%. Banks, Energy, Chemicals, and Metals led, while REITs, Media,Telcom and Retail lagged. Domestic growth sectors (Internet, Commercial Services, Information Technology and Healthcare) are still well ahead over three months…

CYCLICAL SECTORS RALLY WITH THE MARKET - Japanese equities have rallied 3.6% over the last two weeks, and the market composite is now flat since the end of April. Mean reversion was widespread and the range from worst to best three-month change narrowed from 22.5% to 18.1%. Banks, Energy, Chemicals, and Metals led, while REITs, Media,Telcom and Retail lagged. Domestic growth sectors (Internet, Commercial Services, Information Technology and Healthcare) are still well ahead over three months…

Japan Fortnightly Update: Banks to Neutral/Utilities to Negative - Results Momentum Still Slowing

INTERNET, TELECOMS &amp; HEALTHCARE ▲ RETAIL, RESTAURANTS &amp; RAILWAYS▼- Domestic non-financial sectors continue to shine in Japan. However, in the last two weeks, there has been a marked shift away from lower-margin domestic sectors that are now seeing rising fixed and variable costs (Restaurants, Transportation, Media, Retail and Food) towards higher-margin sectors such as Telecommunications, Internet, Healthcare and Information Technology.  The weaker Yen has helped reduce the negative momentum in…

INTERNET, TELECOMS &amp; HEALTHCARE ▲ RETAIL, RESTAURANTS &amp; RAILWAYS▼- Domestic non-financial sectors continue to shine in Japan. However, in the last two weeks, there has been a marked shift away from lower-margin domestic sectors that are now seeing rising fixed and variable costs (Restaurants, Transportation, Media, Retail and Food) towards higher-margin sectors such as Telecommunications, Internet, Healthcare and Information Technology.  The weaker Yen has helped reduce the negative momentum in…

Japan: Sector Weight 3 Month Change - Bi-Polar With A Twist

Japan

Japan Post Holdings Co. Ltd. operates post stations, banks, and insurance business. The Company offers letters and goods transportation services, stamp sales, deposits, loans, and insurance products.

Price Gauge
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Japan Post Holdings (6178 JP)

JAPAN FLOW Redux : Foreign Investor Flows (Still) Matter, and They Are (Still) Cyclical

A Bloomberg story this past week titled "A $35 Billion Selloff Is Pulling Down Japan's Stock Market" (link) got tweeted into my Twitter timeline so...

Travis Lundy

Japan: Results & Revision Scores Summer 2018 Update - Market Composite, Sectors & Peer Groups

A GOOD QUARTER - The Composite Results Score has now declined for seven months in a row and is implying a slowing of the upward momentum in...

Campbell Gunn

Aequitas: Kokusai Electric Placement - Past Deals Have Been Mixed but Its a US$1bn Cleanup

KKR is looking to raise around US$960m through an accelerated secondary offering for around 10% of Kokusai Electric (6525 JP)’s (KE) stock. In this...

Sumeet Singh

Japan Fortnightly Update: Banks to Neutral/Utilities to Negative - Results Momentum Still Slowing

CYCLICAL SECTORS RALLY WITH THE MARKET - Japanese equities have rallied 3.6% over the last two weeks, and the market composite is now flat since...

Campbell Gunn

Japan: Sector Weight 3 Month Change - Bi-Polar With A Twist

INTERNET, TELECOMS & HEALTHCARE ▲ RETAIL, RESTAURANTS & RAILWAYS▼- Domestic non-financial sectors continue to shine in Japan. However, in...

Campbell Gunn

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