The biggest event of the last month was the unexpected reshuffle of the Nikkei 225, forcing ¥2.3 tri...
The biggest event of the last month was the unexpected reshuffle of the Nikkei 225, forcing ¥2.3 trillion (£13.5bn) of index and arbitrage funds to change their portfolios in the run up to the Easter weekend. Thirty new companies entered the index, mainly well known names like NTT DoCoMo, Tokyo Electron, Seven-Eleven, replacing a group of less well recognised, mainly industrial companies such as Shimura Kako and Mitsui Mining.
The additions represented 42% of the new Nikkei 225, whereas the deleted only accounted for 4%. This resulted in some erratic moves, as deleted companies' share prices collapsed and even those surviving constituent companies were sold off to accommodate the new names. This led to the Nikkei 225 underperforming the wider Topix index by 12% between the announcement of the reconfiguration of the index and the end of April. One major consequence of the reweighting is that the Nikkei 225 now has over 40% in electronics names, double that of the Topix.
The other main news was the collapse in the Hikari Tsushin share price, following lower than expected mobile phone handset sales. This highlights one of the key risks of investing in new Japan companies, where management are often young and relatively inexperienced while valuations are exceptionally high. The shares of Hikari Tsushin finally fully opened on 30 April on rumours, later denied, that Kyocera would buy a stake in Hikari. It is difficult to see a sustained recovery in the company's share price until the fundamentals change.
The Hikari Tsushin debacle and the weakness in the technology stocks in the US caused a sharp sell off in new Japan and internet stocks. This became indiscriminate and resulted in many excellent companies becoming severely oversold, so since their April lows we have seen a large rebound for some of the higher quality new Japan companies, such as Yahoo Japan up 80% by month end and Softbank rising 72%.
The volatility of the market has impacted the new listings with all eight companies currently listed on MOTHERS trading below their first day trading price. Hopefully this will also mean that new listings come out at investable multiples and with 162 companies preparing to go public in calendar year 2000 (50% more than last year), there should be opportunities. Nasdaq Japan opens this summer and expects to attract 100 companies in a year, including 10 with a market cap over ¥1 trillion (£6bn).
Our investments are biased towards growth and restructuring opportunities. Our current focus is paper and pulp and some chemical companies. We have no exposure to steel as there has been no rationalisation and little restructuring. We remain overweight electronics and services, as these promise good growth
Simon Somerville is manager of Cazenove Japanese Fund
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