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Stocks

Market Scramble: 'Whale' suspected in rising tide for value stocks

TOKYO -- Underpriced stocks are a bright spot in a market that remains rather quiet amid lingering doubts about an earnings recovery by Japan Inc., yet some speculate the cheap shares are being lifted mainly by the nation's public pension behemoth.

Shares with low price-to-earnings or price-to-book ratios such as automakers, steel producers and banks drew buying again Thursday as the Nikkei Stock Average rose 0.23% to close at 16,926 points. Toyota Motor gained for a fourth day, while Mitsubishi UFJ Financial Group advanced about 2%.

Blue chips were not the only winners. Regional banks rose in general, with Ehime Bank and Suruga Bank climbing to their 2016 highs.

But defensive shares such as food producers and drugmakers have been sluggish after remaining firm through July. Stocks such as NTT Data and West Japan Railway slid Thursday.

GPIF demand

If the new buying trend is based on a U.S. economic recovery or improvement in bank margins stemming from interest rate hikes, investors likely will chase shares higher.

But some speculate that the favorable climate for value stocks results from one element of demand. The Government Pension Investment Fund may have increased its asset allocation for underpriced stocks, said Masatoshi Kikuchi, chief equity strategist at Mizuho Securities.

The fund, which manages assets for Japan's public pension plans, last fiscal year raised its allocation target for smart beta investments, which pick stocks using profits, dividends and other criteria. These focused on narrow price swings, centering around an index comprising defensive stocks -- which tend to suffer limited losses even during a market downturn.

But investing by GPIF, which manages a staggering 130 trillion yen ($1.26 trillion) in assets, contributed to overheating of some stocks and skewed their price formation. Several defensive stocks soared to levels unjustified by their earnings and other fundamentals. Some theorize that GPIF -- known in the market as "the whale" -- learned this lesson and altered its strategy this fiscal year to allocate more money to underpriced shares.

Doubts raised

GPIF declines to comment on investment strategies, so whether this theory is right is anyone's guess. Some traders voice doubt about the GPIF strategy switch theory, arguing that the shift results from an adjustment in the smart beta asset mix.

The fund held a domestic equity allocation of 21.9% as of the end of August, Nomura Securities estimates. If the pension juggernaut were to raise that figure to one-quarter of its base portfolio, GPIF would have 2 trillion yen to 3 trillion yen to spend in buying equities, chief fiscal analyst Masahiro Nishikawa said.

GPIF seemingly did not pick up domestic equities aggressively in the first quarter of fiscal 2016, which makes it difficult to predict what the fund will do next.

Speculation over the moves of public-sector investors such as GPIF and the Bank of Japan routinely influences market sentiment, while investors remain unable to have full faith in the recovery of corporate earnings and of the global economy.

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