TOKYO -- Individual investors are taking refuge in small-to-midcap Japanese stocks ahead of U.S. President-elect Donald Trump's inauguration, with long-term investments increasingly pouring into components with healthy return on equities.
Roughly 90% of the Tokyo Stock Exchange's first section closed lower Tuesday, pulling the Nikkei Stock Average to 18,813 and below the 19,000-point threshold for the first time in one-and-a-half months. Bucking the trend set by the blue chips are companies with small to midsize market capitalizations that specialize in specific areas. Evolable Asia, which runs an airline ticket booking website, and plant dismantling services provider Besterra both posted all-time highs.
Driving those gains is the robust appetite among retail investors. New account openings at Matsui Securities have accelerated since the beginning of the year. Even as blue chips take a beating, "more individuals are investing in small and midcap stocks on the premise of owning them for the long term," said Tomoichiro Kubota of the Japanese online brokerage.
Even pros are looking at smaller equities. "In order to avoid choppy prices under the Trump administration, investments in superior small to midcap stocks are promising," said Tomohiro Okawa at P.S. Oskar Group.
What sets that asset class apart is their immunity to market swings caused by international investors swayed by Trump's statements. Because smaller-cap Japanese equities are often lightly traded, foreigners and their large portfolios tend to shy away. Those stocks are also buffered from currency fluctuations, since many of those companies concentrate operations domestically.
Another reason minor issues are gaining popularity is their tendency to buy back shares in order to prop up prices. "Companies take time to purchase [their own shares] by taking liquidity into consideration, which tends to extend the period in which stock prices get a boost," said Okawa.
P.S. Oskar took a look at corporations that announced share repurchases over the past five years. It defined large-cap companies as those having market values above 200 billion yen ($1.77 billion), while minor companies hover between 20 billion yen and 200 billion yen. When comparing performances against the market average, smaller-cap stocks started outpacing blue chips around 20 days after announcing buyback plans. The spread grew to 1 percentage point at the 100-day mark.
The more attractive smaller-cap stocks share elevated ROEs. Those companies typically enjoy strong earnings and are eager to shower investors with stock buybacks and other rewards. Prices of small-to-midcap index constituents are more likely to track high forward ROEs, according to an analysis by Nomura Securities.
Several smaller-cap components have lagged during the Trump rally after the November election, despite their high ROEs. Among top-ranking ROEs within that club are firms that provide especially niche services and control large market shares, data by Nomura Securities shows. Some of the companies fitting the bill, like concrete-fortifier Sho-Bond Holdings and online- payment processor GMO Payment Gateway, are set to earn record profits this fiscal year.
The TSE and Nikkei Inc. plan to launch in March the new JPX-Nikkei Mid and Small Cap Index, which will include components with high ROEs. If the Trump effect is passed on to small but unique companies, investors can expect a sustained rally in that category.