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Stocks

Market Scramble: Tokyo investors hedging against no-Brexit rally risk

TOKYO -- The growing momentum for supporters of a Brexit suggests that Japanese shares could tumble in the wake of the referendum, but investors are increasingly preparing for a possible rebound should the U.K. vote to stay in the European Union.

Market players are chattering about the growing stockpile of call options on the Nikkei Stock Average for July delivery. The balance of calls -- which gives a holder the right to buy shares -- with an exercise price of 18,500 reached 21,343 contracts Thursday. The rise was notable in particular because the benchmark plummeted 485.44 points to 15,434.14 that day.

Typically during a market slide, put options tend to build up as investors hedge against a further drop. But that is not entirely the case this week. The balance of calls increased by 84,000 contracts between Friday and Thursday, or 20% more than the gain of 68,000 contracts for puts.

After some U.K. polls showed the "leave" camp leading those favoring "stay," investors have started bracing for possible market turmoil in the case of departure after the June 23 vote. Still, some predict no change to the U.K.'s EU membership, with Jim McCaughan, CEO of Principal Global Investors, predicting a "remain" probability of 70%. If the verdict is to stay in the regional bloc, the market is expected to rebound to the extent of canceling out the steep correction it has undergone thus far. Investors are growing aware of the possible risk of missing the boat to enjoy this gain.

Japanese stocks are also influenced by a country-specific factor. Whenever uncertainty rises in the market, the yen tends to appreciate -- which makes shares here more susceptible to selling than their counterparts in other industrialized economies.

"With a 'remain' vote, Japanese stocks would instantly stage a rally bigger than that for U.S. shares because they have been sold excessively," said Yusuke Kuwayama at Tokio Marine & Nichido Fire Insurance.

"Under a 'remain' result, investors welcoming this outcome may buy back stocks for a sustained period of time," said Fumio Matsumoto at Dalton Capital (Japan). His remarks were based on the findings by a Bank of America Merrill Lynch fund manager survey out Tuesday that showed the cash holdings ratio among institutional investors around the world stands at the highest point since 2001. This indicates that the built-up cash safety net is waiting to be spent.

An unstable market is an investor's friend that offers an opportunity to buy good stocks at a discount, said Matthew McLennan, portfolio manager at First Eagle Investment Management. He plans to visit some 20 companies, including those in which his firm may newly invest, during his current stay in Japan.

No one knows what the referendum's outcome will be. One thing we know for sure is that the uncertainty over the market will peter out after the vote. When that happens, the energy will likely be greater for the money returning to the market with a "remain" result. This must be the sentiment among investors that are buying call options right now.

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