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Stocks

Market Scramble: Foreigners keep chasing Japanese futures

Investors upbeat about corporate earnings

TOKYO -- Despite the recent top-heavy activity of the Japanese market, traders remain mostly upbeat because of futures buying by foreign brokerages.

The Nikkei Stock Average rose 63 points on Wednesday, during which the Tokyo Stock Exchange's first section recorded the weakest trading volume of 2017. However, "observable large-lot purchases of Topix futures have become a frequent topic of discussion since the beginning of the year," said a trader at a major brokerage who is familiar with trends among overseas orders.

The most recent of those buys occurred Tuesday morning. Although the Nikkei average closed a shade lower at the midday break, the Topix index remained on the positive side. Data released later that day revealed that none other than Goldman Sachs picked up some 5,397 Topix futures contracts on a net basis.

This type of periodic purchasing of futures based on the Topix index by foreign brokerages has been ongoing since the U.S. presidential election in November. Goldman Sachs in particular has taken out a huge long position, adding another 1,139 contracts on a net basis Wednesday. Outstanding purchases total 74,838 contracts, a level not seen since August 2015.

While short-term speculators prefer Nikkei average futures due to their high level of liquidity, many long-term investors are seen trading Topix futures. There are cases where Japanese equities are temporarily kept overweight using futures that can be flexibly traded. The futures are then sold off for individual cash stocks that flesh out portfolios.

"There is no mistaking that purchases by American pension funds and others are behind" the orders by the foreign brokerages, said the trader mentioned earlier. "The bullish sentiment will continue."

The yen depreciation that dramatically accelerated since Donald Trump won the U.S. election has lost steam recently. With the inauguration coming up, investors are growing more jittery about his economic policies. So the question remains what is motivating overseas stock pickers to snap up Japanese equities.

A fund manager at a foreign asset management company believes corporate earnings forecasts are the main driver. Japanese equities are much more likely to be subject to analyst upgrades when compared with other major economies, according to data compiled by Goldman Sachs on Monday.

Corporate America is being weighed down by the strong dollar and rising interest rates, two factors that may limit improvements in profitability. But Japanese companies are more than likely to secure bigger profits in the near future if the yen rate continues to hover around 115 per dollar. Price-book ratios also indicate that Japanese equities are comparatively undervalued. Foreigners can be safely optimistic about the Japanese market, said an official at U.S. asset manager GMO.

There were signs Wednesday that foreign investors' appetites have spread beyond futures. Sony, where foreigners make up over half of shareholders, saw buy orders suddenly pick up on Tuesday, and on Wednesday the stock topped even last year's high.

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