Tokio Marine Asset Management examines how an increasing number of upcoming IPOs, such as the one for Japan Post, the country's largest bank and insurer, may impact supply-demand dynamics in an already buoyant Japanese stock market.
Despite a brief pause after last year's consumption tax hike, the Japanese stock market has continued its advance since the start of Abenomics and has risen for five consecutive months since the turn of the year, with the TOPIX and the Nikkei indices gaining 17.36% and 16.83% respectively YTD1.
The Bank of Japan's additional stimulus measures in October last year are seen as the catalyst for the second leg of the Abenomics-inspired rally. In a wider context, however, we believe that excess liquidity in global markets due to factors such as monetary easing by the ECB and the lowering of interest rates in China are helping to fuel price rises.
While in Europe the bottoming out of bond yields has capped gains in stock prices, Japan has benefitted from several unique factors supporting the sustained rise in its stock market. These include stable profit growth for companies benefitting from the weakening yen as well as a recovery in domestic demand owing to wage increases.
In addition, the recently introduced Corporate Governance Code should encourage more companies to improve governance and shareholder return, while the continued financial inflow from the BoJ and public pension funds should provide further support.
An important aspect of how the inflow of funds into stocks from this globally low interest rate environment is the way it's transforming the market. While the most suitable substitute for investing in bonds would normally be low volatility/high quality stocks, we are instead seeing a switch to high beta cyclical stocks. The outperformance of financials, such as big banks and insurance companies, while they lagged in 2014 has been striking this year in Japan.
One of the primary reasons for this is believed to be the government's planned privatisation of the Japan Post Holdings, which is made up of banking, insurance and postal businesses, via an IPO this autumn. The funds raised from the sale have been earmarked by the government to be spent on rebuilding projects in areas damaged by the 2011 earthquake and tsunami.
It's expected the price of mega-banks and large insurance companies will act as a reference when setting the price for the public offering. However, the government is particularly worried about the price it will receive for Japan Post Bank, as most mega-banks in Japan trade much lower than a PBR of 1.
This has led to the market speculating that the government may support banking stocks in an effort to sell its shares in Japan Post Bank at a higher price, which could explain their recent outperformance.
Japan Post's impending IPO may also be speeding up the public offerings of already listed and unlisted companies. In May, with prices up, investment funds put up for sale their holdings in Skylark (73.4bn yen) and Seibu Holdings (110bn yen).
In addition, Rakuten announced its decision to raise 188 billion yen in a public share sale while Universal Studio Japan announced plans to list on the Tokyo Stock Exchange. Line Corp., maker of Japan's most widely used messaging app, has been considering an IPO since last year. It's been mooted that these companies will list early in an effort to avoid the big IPO in autumn.
The last IPO of a similar magnitude to Japan Post's upcoming offering was in 1987, when the government sold its stake in NTT, the telecommunications giant, raising 2.37 trillion yen in just the first offering. (Please see the chart below for more examples).
Chart 1: Significant public offerings of state-owned companies since 1985 (trillion yen)
Source: Bloomberg
The number and scale of these upcoming IPOs will have a profound effect on the domestic stock market in our view. We envisage the supply-demand dynamics to deteriorate and slow down the pace of gains made by TOPIX and the Nikkei. Rather, as mentioned earlier we believe more companies will adopt capital policies that better consider their shareholders, and so widen the disparity between firms.
In a situation such as this, we believe active stock selection will be vital in choosing companies that outperform. We will be cautious regarding Japan Post's IPO this autumn as we are mindful of the shift in dynamics from a market driven by excess liquidity to one in which stock prices are dependent on company performance.
Finally, we hope that moving forward the government considers policies that ensure the smooth listing of large state-owned companies rather than creating peaks in the market.
1Bloomberg, as at 15 June 2015.
● Tokio Marine Asset Management is a Japan/Asia equity specialist with 30 years' market experience and approx. $55bn AUM (as of March 2015) . The Focus strategy is a concentrated portfolio of 20-40 high conviction stocks using the best investment ideas of today.
For more information about the strategy, please contact Business Development at Tokio Marine Asset Management (London) Ltd.
Email: [email protected]
Tel.: +44 (0)20 7280 8580
Website: www.tokiomarineam.co.uk
Disclaimer
Important Information: This document is intended to be for indicative purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This information is for professional investors only and is not suitable for retail investors. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Tokio Marine Asset Management does not warrant its accuracy. No responsibility can be accepted for errors of fact or opinion. Issued by Tokio Marine Asset Management (London) Limited, 20 Fenchurch Street, London, EC3M 3BY, U.K. which is authorised and regulated by the Financial Conduct Authority. You may not copy, reproduce, recompile, decompile, disassemble, distribute, publish, display, modify, upload, transmit, or in any way exploit any part of the document.
