Only a matter of weeks ago I was amusing a conference audience by showing them my happy chart of the huge rise in the Japanese stock market over the past few months. A day ago, I woke to find that, after a shocker of a week, the Nikkei 225 was a good 18% off its peak. And that headline number is only the beginning of the story – look at the way some of the individual names have moved – down 50%! Down 60%! – and you will see that there has been financial carnage across Tokyo.
In another world I would feel a little stressed out by this. Indeed, even a few years ago, being invested in a market that managed to move 20% up or down in a matter of days would have left me a quivering wreck. But today I’m just not that bothered.
Why? First, because the market had risen so much, so fast in the first place. History gives us no examples that I know of of stock markets that go up 60% plus in just a few months and then don’t correct at all. It just doesn’t happen, so it is perfectly reasonable to ignore the move simply on the basis that it is a correction of a previous overshoot – let’s not forget that Japanese equities as a whole are still up 50% odd from their lows in October.
Second, because the market moves have absolutely nothing to do with the success or failure of ‘Abenomics’ – given that most of Prime Minister Abe’s policies have barely fallen from his lips, it is, I think, a little early to dismiss them. They also have very little to do with the fundamentals of Japan’s corporate sector – the thing that I persist in believing that I am invested in.
So what do they have to do with? All market falls are about more sellers than buyers. And there were several clear sellers here. The most interesting was Japan’s trust banks – whose main business is the managing of Japan’s pension funds and in particular the $1.1trn Government Investment and Pension Fund (GIPF).
A note from GavKal points out that the GIPF has had an 11% core allocation to domestic equities (this rose to 12% this week) with a maximum allocation of 17%. The big gains in the Nikkei pushed their holding beyond that and forced sales.
But while this lot kicked it off, the move has been hugely exacerbated by the skittishness of all investors, domestic and foreign, and by their obsession with central banks. The stock market is supposed to be a reflection of all our expectations. But at times such as this – times of financial repression, uncertainty and monstrous levels of market manipulation – our expectations change violently all the time.
One day we think the Federal Reserve will start to taper off quantitative easing (QE), so in expectation of the economy getting better but the flow of money into the market getting worse, we sell stocks and buy dollars frantically. This is now being referred to as the ‘normalisation scare’.
The next day we do the opposite – the “it’s OK, everything is still awful” trade. We know that the only thing really holding up markets is the hocus-pocus of QE, so we can think of nothing but what might happen to QE next. The slightest vague comment on the matter from anyone at the Fed, and volatility goes nuts. And of course, volatility breeds more volatility, confusion more confusion.
So when you have markets jammed with speculators and momentum-led funds there are lots of shorts to cover, knee-jerk overtrading orders to yell about and general panic to indulge in. Repressionary markets led by untrustworthy central banks are volatile markets.
All this backs my long-held view that investing is better left to part-timers – if you aren’t in the office more than three hours a day, you aren’t likely to find yourself getting too caught up in other hedge fund’s hysteria – and suggests that long-term fundamental investors like you and me should mostly be sitting this kind of thing out. The fact is that the fundamentals are just fine.
Abe’s plans aren’t all going to work out but Japan’s recent economic data are pleasingly good anyway. Christopher Wood, a strategist at Asian brokerage CLSA, points out that mid-year bonuses for Japanese workers are set to rise 7.37% in 2013. That’s the largest increase since 1990 (8.36%). A rise in base pay for everyone would be good but this is a nice start.
At the same time Tokyo office vacancies have fallen to their lowest level for three years and, says SMBC Nikko’s Jonathan Allum, the consensus view on Japanese growth for 2013 has risen from a miserable 0.65% to a respectable 1.5%.
Finally, in what Allum calls “the really good macro news”, the Japanese fertility rate rose to 1.41% in 2012. That might sound low, but it is a 16-year high, a higher number than the South Koreans can claim and a clear turnaround.
It is also worth remembering that Japan is still pretty cheap on almost all measures. You can still buy the market for all the right reasons. However, if the right reasons don’t do it for you, I also think you can still buy it for the wrong reasons too.
We don’t know if QE does much for economies yet, but one thing I think we can agree on is that it does wonders for stock markets. Japan is going to do a lot of QE. So this market is most likely to start rising again pretty soon. Not that its short-term direction bothers me either way, of course.
• This article was first published in the Financial Times.
[xyz_lbx_custom_shortcode id=6]