TOKYO -- The rocky international economy is challenging the notion that earnings at Japan Inc. remain healthy compared with those of U.S. and European companies, driving choosy investors to snap up small-cap stocks less sensitive to global variables.
Large-cap shares drove the Nikkei Stock Average below 18,000 on Wednesday for the first time in roughly two weeks, fueling a 343-point loss to 17,891. Companies with shaky earnings outlooks were the hardest hit. Bottled tea maker Ito En tumbled as much as 6% after an SMBC Nikko Securities analyst downgraded fiscal 2015 profit projections for the company a day earlier. Daihatsu Motor suffered a two-day loss of 9% upon news that domestic car sales are foundering.
Market observers saw Japanese companies as performing well this fiscal year thanks to the weak yen, cheap oil and salary bumps. The bullish quarterly reports attracted investment money, but earnings revisions by stock analysts suggest the global slowdown triggered by China is sapping that momentum. An index based on Goldman Sachs data tracking such earnings revisions shows that Japanese companies face net downward adjustments entering October for the first time in roughly 18 months.
More analysts are marking down commodity-related companies due to decelerating economies in China and other emerging countries, said Kathy Matsui, Goldman's chief Japan equity strategist.
In spring 2014, the last time Japanese companies hovered in downward adjustment territory, the world economy had begun to look unsteady as well. However, China's economy proved resilient, and Japanese companies climbed out of the hole about two months later. But this time, China's slowing economy suggests things may turn out differently.
Analysts see earnings per share for major Japanese stocks rising 17% in fiscal 2015, beating the 5% gain for European stocks and a 3% decline for U.S. shares. Yet the downward revisions threaten to undercut Japan's number, putting market watchers on edge.
Institutional investors are responding by flocking to small-cap companies. One is Toshiya Kimura, the head of Singapore-based Village Capital, a Japan-focused hedge fund. He is unloading commodity-based shares in favor of minor stocks dependent on domestic demand, saying the latter offer more peace of mind since they are less exposed to global economic fluctuations.
Large-cap stocks have sank 6% since the end of March while small caps fell less than 1%, Topix first section subindices based on market capitalization show. Absent other persuasive reasons to buy small-cap shares, the dynamic implies that investors are seeking safety from large caps.
Shinkin Asset Management was among the first to shift to small-cap stocks. "At first we were going to hold on to them temporarily, but we might continue prioritizing small-cap stocks for some time to come," said chief fund manager Naoki Fujiwara, a sentiment souring hopes for a real market turnaround.