TOKYO -- Reporting season kicks off Thursday for Japanese blue chips' April-September results, giving active investors a prime opportunity to line up behind shares of companies with healthy profits and sales -- and worry less about external factors.
The Nikkei Stock Average edged up 0.26% Monday to 16,900, but some traders are still tense. "This year has been the toughest so far," said a fund manager at a Japanese asset management firm who has been overseeing an actively managed fund since before the global financial crisis. Share prices are not reflecting individual corporate earnings these days -- hence the fund manager's exasperation.
Mizuho Securities looked at constituents of the Topix 500 index and found that the type of industry an issue belongs to explains over 70% of the valuation. Individual earnings and company-specific factors do not even account for 30%. Industry affiliation has contributed to less than 40% of the valuation on average since 1978, with corporate earnings normally the primary factor.
"The market's shifting focus toward the monetary policies and political bearings of major industrial nations has played a big role" in the recent deviation from the norm, said Hayato Nagayoshi at Mizuho Securities.
However, Sanae Sakai at Sumitomo Mitsui Asset Management sees "signs of a transition" on the horizon. Spurring that view are the quarterly reports already turned in by retailers. Drugstore shares were sold as a group starting in June, then went in separate directions after earnings were released.
For example, Create SD Holdings, whose operating profit fell during the June-August quarter, hit another year-to-date low on Monday. But rivals Welcia Holdings and Cosmos Pharmaceutical are each trading near year-to-date highs thanks to 40-60% profit gains during the period.
Uncertainty regarding events outside Japan has eased, giving investors a chance to concentrate on fundamentals. Financial markets see a roughly 70% likelihood of the U.S. raising its policy rate in December. The Federal Reserve has raised rates when expectations reached that level in the past. Armed with this knowledge, many market players see a December hike as nearly a done deal.
A presidential victory by Hillary Clinton has also become a safer wager. She has an 84% chance of winning the election, according to Iowa Electronic Markets, a futures market run by the University of Iowa for research and teaching purposes. "A 65% chance of winning is considered the safe zone, so the presidential election is pretty much no contest at this point," said Toshiyuki Suzuki at the Bank of Tokyo-Mitsubishi UFJ.
Meanwhile, investors in the Japanese market have been busy buying up export-heavy value stocks in the aftermath of the April-June reporting period. Before then, investment portfolios heavily favored companies oriented to domestic demand. Now that asset mixes are less one-sided, "the stage is set [for investors] to choose based on the content of the earnings report, regardless of whether a company relies on exports or domestic demand," said an analyst at Norinchukin Zenkyoren Asset Management.
Market players remained in a wait-and-see mode on Monday, according to a major Japanese brokerage. Trading value on the Tokyo Stock Exchange's first section fell well short of 2 trillion yen, the threshold for an active market. But that may also indicate that active investors looking to put their portfolios into overdrive are waiting for earnings reports to provide the correct guidance.