TOKYO -- Japanese stocks' rocky start to the year has led many market players to focus on a few sound companies, leaving investors priced out of these stocks to hope that domestic institutional investors turn less risk-shy with the new fiscal year.
A fund manager boasted of positive returns for the January-March quarter even as the Nikkei Stock Average plunged 12%. "It's because I noticed differences in profit structures," the manager said.
One successful trade was shorting Alps Electric while buying ball-bearing maker Minebea, based on differing impacts from a slowing smartphone market and a stronger yen. Although both companies' shares have declined since the end of last year, Minebea showed more resilience, and the fund manager turned a profit as hoped.
Buying of companies seen as able to buck the overall downward trend surged during the quarter. Reversals in historical market capitalization comparisons indicate that fund managers have piled into many of the same stocks.
Machinery maker Keyence's market cap has topped rival Fanuc's for the first time. Mitsubishi Electric's market cap has climbed above Hitachi's on several occasions -- something that had not occurred since the 2011 earthquake and tsunami. Trading house Itochu surpassed Mitsui & Co. at one point for the first time in 29 years.
"Stocks with high resistance to industry slumps" gained ground during the quarter, said Keita Kubota of Aberdeen Asset Management.
At Keyence, "the earnings-linked portion of labor costs is worked out monthly, so profit margins are less prone to shrinking," said Yoshinao Ibara, an analyst at Morgan Stanley MUFG Securities. Mitsubishi Electric, which has an edge in low-key but profitable businesses such as elevators, air conditioners and power modules, is seen as having a 10-year head start over Hitachi on restructuring. And Itochu is among the less resource-dependent Japanese trading houses.
But when stocks become popular, they also become pricier. Keyence's price-to-book ratio is significantly higher than Fanuc's. The company's return on equity will probably drop unless it sharply increases shareholder payouts, Ibara said.
The reliable investments that were so popular between January and March are harder to enter now. Investors left with few options hope that negative interest rates will spur a shift in the fiscal year starting Friday. "Institutional investors will start taking more risk when the new fiscal year begins," said Satoshi Kashihara, head of electronic trading services at Nomura Securities.
Financial institutions at a loss for investment options are allocating more money to nonpublic mutual funds investing in such assets as real estate, said Shunichi Yamada, a managing director at Goldman Sachs Asset Management.
Although insurers and banks are expected to invest mainly in foreign assets, this would boost Japanese stocks by putting downward pressure on the yen. Stocks like Keyence and Mitsubishi Electric growing less appealing as investors become less conservative would likely signal a change in the market.