Nomura_Outlook for Japanese equities heading into 2019_watermark

vk.com/id446425943	9 November 2018
No ura | Japanese equities investment strategy (November 2018)

3. Supply-demand: signs of lull in selling of futures by nonresident investors

Equity trading in first four weeks of October 2018

In terms of combined trading on equity markets (Japan's two main exchanges, same hereafter) and futures markets (TOPIX futures, mini TOPIX futures, Nikkei 225 futures, Nikkei 225 mini futures, and JPX-Nikkei Index 400 futures, same hereafter) from 1 through 26 October, nonresident investors were net sellers for the first time in two months and trust banks were net sellers for the first time in five months. The main net buyers were individual investors, proprietary accounts, and investment trusts (Figure 22).

Fig. 22: Trading by investor category (total for two main stock exchanges and five share price index futures)

										(¥bn)
			Foreigners	Life/nonlife	Banks	Trust	Investment	Non-	Individual	Proprietary
								financial
				insurers		banks	trusts		investors	trading
								companies
	FY
	16		1,248	-537	-639	468	-3,461	2,068	-4,613	5,363
	17		-4,617	-430	-694	389	758	1,604	-3,968	6,477
	18		-1,844	-197	-552	520	-771	1,037	-1,174	2,788
	Monthly
		Nov	-948	-39	-376	-361	337	171	142	1,056
		Dec	-191	-8	252	106	169	152	-558	25
	18	Jan	-2,530	-39	-92	382	451	86	207	1,391
		Feb	-3,812	-29	-69	250	647	476	1,169	1,058
		Mar	-2,371	-41	4	484	728	37	309	769
		Apr	1,786	-21	-145	62	-183	14	-809	-583
		May	-13	-50	-78	-203	-517	452	-362	729
		Jun	-780	-10	-78	318	-237	127	-93	598
		Jul	766	-20	15	59	-399	136	-661	93
		Aug	-538	-9	-110	9	-155	239	69	471
		Sep	744	-64	-132	537	-403	-53	-857	333
		Oct	-3,809	-23	-23	-262	1,122	122	1,539	1,147
	Weekly
	Oct	wk1	440	-26	-108	-167	-187	1	95	-68
		wk2	-1,828	0	113	-201	451	48	818	511
		wk3	-1,116	5	-84	43	453	28	212	395
		wk4	-1,306	-2	55	62	405	46	414	309

Note: Total trading in Japanese equities on Tokyo and Nagoya stock exchanges and trading in TOPIX futures, mini TOPIX futures, Nikkei 225 futures, Nikkei 225 mini futures, and JPX-Nikkei Index 400 futures. Positive figures indicate net purchases and negative figures indicate net sales. Numbers for FY18 and October 2018 are through fourth week of October.

Source: Nomura, based on Tokyo Stock Exchange (TSE) and Osaka Securities Exchange (OSE) data

Nonresident investors net sellers for first time in two months

Nonresident investors were net sellers of equities and equity futures combined for the first time in two months, by ¥3,809.4bn. They were net buyers by ¥440.2bn in the first week of October, but net sellers by more than ¥1trn for three straight weeks from the second week through the fourth week, triggered by sharp declines in US equities.

Futures accounted for most of the net selling, and net selling of futures by ¥1,499.2bn in the second week of October represented the highest reading since the first week of June 2004, the earliest month for which data is available.

Signs of lull in net selling on futures market

Figure 23 shows average net buying of futures by nonresident investors in the weeks following a weekly decline in the TOPIX of at least 3%, and a weekly decline in both the TOPIX and the S&P 500 of at least 3%. It shows that in both cases, it takes around three weeks for net selling of futures by nonresident investors to run its course. Nonresident investors were major net sellers of futures for three straight weeks from the second week through the fourth week of October, but past performance suggests that this selling could well contract in future.

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No ura | Japanese equities investment strategy (November 2018)

Fig. 23: Net purchases by nonresident investors after equities have fallen (futures market)

(¥bn)
150
100
50
0
-50
-100
-150						TOPIX and S&P 500 fall by at least 3%
-200						TOPIX falls by at least 3%
-250
-300
0	2	4	6	8	10	12	14	16	18	20	22	24	26	28	30
	No of weeks, week in which TOPIX (TOPIX and S&P 500) fall(s) by at least 3% = 0

Note: Data from 2005 onwards. Shows average net buying of futures by nonresident investors in the weeks following a weekly decline in the TOPIX of at least 3%, and a weekly decline in both the TOPIX and the S&P 500 of at least 3%.

Source: Nomura based on OSE, S&P data

Risk of sustained net selling of cash equities

However, it looks as though nonresident investors will continue to pull funds from the market for cash equities. They had started to show signs of returning to this market, engaging in net buying for three straight weeks from the third week of September through the first week of October, when they staged their highest net purchases since the fourth week of October 2017. However, Figure 24, which takes the same approach towards the cash equities market as Figure 23 takes towards the futures market, shows that net selling tends to continue for around six weeks after the TOPIX has fallen by at least 3%. Moreover, net selling of cash equities tends to be larger and more prolonged when the S&P 500 has also fallen by at least 3% at the same time.

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No ura | Japanese equities investment strategy (November 2018)

Fig. 24: Net purchases by nonresident investors after equities have fallen (cash market)

(¥bn)
150
100
50
0
-50
-100						TOPIX and S&P 500 fall by at least 3%
-150
						TOPIX falls by at least 3%
-200
-250
-300
0	2	4	6	8	10	12	14	16	18	20	22	24	26	28	30
	No of weeks, week in which TOPIX (TOPIX and S&P 500) fall(s) by at least 3% = 0

Note: Data from 2005 onwards. Shows average net buying of futures by nonresident investors in the weeks following a weekly decline in the TOPIX of at least 3%, and a weekly decline in both the TOPIX and the S&P 500 of at least 3%.

Source: Nomura based on TSE, S&P data

Focus on stocks with low nonresident ownership ratios

Assuming that net selling of cash equities by nonresident investors will continue, we focus on stocks with low nonresident ownership ratios for selection purposes. We have created a portfolio comprising the bottom 10% of Russell/Nomura Large Cap constituents in terms of nonresident ownership ratios and compared cumulative excess returns versus the TOPIX with trading in cash equities by nonresident investors (Figure 25). This portfolio tends to outperform the TOPIX when nonresident investors are net sellers of cash equities. Figure 26 shows the bottom 10% of stocks in terms of nonresident ownership ratios, based on recent data. These stocks could outperform the TOPIX if nonresident investors remain net sellers of cash equities.

Fig. 25: Performance of stocks with low nonresident ownership ratios

(¥trn)				Cumulative net buying by nonresident investors (lhs)								(ppt)
70				Cumulative excess returns versus TOPIX of stocks with low nonresident										80
60				ownership ratios (rhs)										70
50														60
40														50
30														40
20														30
10														20
0														10
-10														0
00			02	04	06	08	10	12	14	16	18	(CY)

Note: We constructed a portfolio consisting of the bottom 10% of Russell/Nomura Large Cap stocks in terms of nonresident ownership ratios and calculated cumulative monthly excess returns versus the TOPIX. Monthly rebalancing. Boxes show periods in which nonresident investors were net sellers of futures.

Source: Nomura, based on data disclosed by companies and TSE data

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Fig. 26: Stocks with low nonresident ownership ratios

			Nonresident	Data as of:
	Code	Company	ownership ratio		TSE33 sector
				(yy/mm)
			(%)
	2002	Nisshin Seifun Group	15.24	18/03	Foods
	2651	Lawson	16.06	18/02	Retail trade
	2801	Kikkoman	16.86	18/03	Foods
	2809	Kewpie	9.32	17/11	Foods
	2811	Kagome	9.96	17/12	Foods
	4151	Kyowa Hakko Kirin	15.77	17/12	Pharmaceutical
	4272	Nippon Kayaku	16.49	18/03	Chemicals
	4530	Hisamitsu Pharmaceutical	14.55	18/02	Pharmaceutical
	4581	Taisho Pharmaceutical Holdings	12.92	18/03	Pharmaceutical
	4661	Oriental Land	12.77	18/03	Services
	4676	Fuji Media Holdings	16.90	18/03	Information & communication
	6178	Japan Post Holdings	10.34	18/03	Services
	6305	Hitachi Construction Machinery	15.17	18/03	Machinery
	7180	Kyushu Financial Group	14.52	18/03	Banks
	7182	Japan Post Bank	2.75	18/03	Banks
	7205	Hino Motors	17.05	18/03	Transportation equipment
	7211	Mitsubishi Motors	15.94	18/03	Transportation equipment
	8028	FamilyMart Uny Holdings	13.05	18/02	Retail trade
	8086	Nipro	15.99	18/03	Precision instruments
	8267	Aeon	11.23	18/02	Retail trade
	8410	Seven Bank	15.77	18/03	Banks
	9006	Keikyu	13.47	18/03	Land transportation
	9007	Odakyu Electric Railway	12.55	18/03	Land transportation
	9008	Keio	13.80	18/03	Land transportation
	9041	Kintetsu Group Holdings	14.79	18/03	Land transportation
	9044	Nankai Electric Railway	7.59	18/03	Land transportation
	9045	Keihan Holdings	13.40	18/03	Land transportation
	9048	Nagoya Railroad	15.85	18/03	Land transportation
	9202	ANA Holdings	11.72	18/03	Air transportation
	9437	NTT Docomo	13.54	18/03	Information & communication
	9504	Chugoku Electric Power	12.60	18/03	Electric power & gas
	9507	Shikoku Electric Power	13.95	18/03	Electric power & gas
	9533	Toho Gas	14.36	18/03	Electric power & gas
	9602	Toho	15.70	18/02	Information & communication
	9613	NTT Data	16.31	18/03	Information & communication

Note: Bottom 10% of Russell/Nomura Large Cap constituents in terms of nonresident ownership ratios.

Source: Nomura, based on data disclosed by companies and TSE data

Individual investors turn net buyers for first time in two months

Individual investors were net buyers of equities and equity futures combined for the first time in two months, by ¥1,538.8bn. As of the fourth week of October, their net buying was at the highest level since January 2002, when data first became available. As discussed below, investment trusts were also major net buyers, suggesting that individual investors have responded to falling share prices by moving into the Japanese equity market in both a direct and indirect fashion. However, sustained declines in Japanese equities throughout October have resulted in higher unrealized losses on the long margin positions of individual investors. The unrealized gain/loss ratio of -16.1% on long margin positions as of 26 October represents the worst reading since 8 July 2016. As a result, net buying on margin shrank from ¥228.1bn in the second week of October to ¥117.4bn in the third week and ¥36.9bn in the fourth week.

Investment trusts net buyers for first time in seven months

Investment trusts were net buyers of equities and equity futures combined for the first time in two months, by ¥1,122.3bn. Just like individual investors, their net buying as of

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No ura | Japanese equities investment strategy (November 2018)

the fourth week of October was at the highest level since January 2002, when data first became available. Investors looking to capture an equity rally moved into leveraged investment trusts, and this prompted net buying of ¥837.7bn on the futures market. We estimate that net inflows into leveraged investment trusts totaled ¥438.8bn in October.

Sixth consecutive month of net purchases in proprietary trading category

The proprietary trading category made net purchases of equities and equity futures combined for the sixth straight month, by ¥1,146.6bn. It was a net buyer of futures by ¥2,377.0bn, but a net seller of cash equities by ¥1,230.4bn. Proprietary account purchases of futures look to have offset sales by nonresident investors. This category also unwound long arbitrage positions by selling cash equities at the same time as purchasing futures. The long arbitrage balance (ie, outstanding long positions on the cash market related to arbitrage transactions) fell ¥1,510.4bn from the 28 September level to ¥1,061.4bn as of 26 October, its lowest level since 11 November 2016.

Total purchases by the BOJ of ETFs (excluding ETFs related to its program for companies investing heavily in capital equipment and human resources) in October (1–26 October) came to ¥773.3bn. The BOJ also spent ¥70.3bn on 29 October, taking monthly purchases to ¥843.6bn, above the previous all-time high registered in March 2018.

(Naoya Fuji)

Fig. 27: Outlook for Japanese equity supply-demand

							(¥trn)
	CY:	15	16	17		18E
	Nonresident investors	-2.7	-2.1	+2.3	-5.5 - -4.5
	Individual investors	-2.6	-2.4	-3.4	+0.5	-	+1.5
	Investment trusts	+1.2	-2.4	-1.7	+0.5	-	+1.5
	Public pension funds	+2.4	+1.0	+0.6	+0.0	-	+1.0
	Corporate pension funds	-0.3	-0.8	-1.2	-0.5	-	+0.5
	Share buybacks	+4.9	+5.5	+3.8	+5.0	-	+6.0
	Nonfinancial companies (ex share buybacks)	-2.0	-0.6	-2.6	-2.5	-	-1.5
	Equity finance	-3.7	-1.4	-3.4	-5.5	-	-4.5
	Banks	-0.2	-0.5	-0.8	-1.0	-	+0.0
	Insurers	-0.3	-0.6	-0.4	-1.0	-	+0.0
	Central bank/government institutions	+3.1	+4.6	+5.9	+4.5	-	+5.5

Note: Forecasts for 2018 based on supply-demand conditions assuming TOPIX at 1,850 at end-2018. Data for each trading category based on total for equities and equity futures. Data for nonresident and individual investors include trading for equity financing purposes. Latest estimates as of September 2018.

Source: Nomura, based on TSE and OSE data

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4. Investment theme: Osaka-Kansai Expo

2025

Decision on host country for World Expo 2025 draws near

On 23 November 2018 the 170 member states of the Bureau International des Expositions (BIE) will elect the host country for World Expo 2025. The three candidate countries in the running are Japan (Osaka), Azerbaijan (Baku), and the Russian Federation (Ekaterinburg). The country that secures a two-thirds majority in the first round will be elected as the host country, or, in the event of no country securing a twothirds majority in that round, the host country will be decided via a further ballot of the top two candidates, via a simple majority. If Japan's bid is successful, the 2025 OsakaKansai Expo will be held on the artificial island of Yumeshima in Osaka Bay (Figure 28). Below we refer to the Osaka-Kansai Expo 2025 as the Osaka Expo.

Fig. 28: Proposed site of the Osaka-Kansai Expo

Source: Nomura, based on illust image, METI's Bid Dossier (25 September 2017)

Competition is fierce among Expo bid candidates

Azerbaijan has stepped up its offensive with plans to support developing countries using its abundant oil funds. Russia was among the two final candidates for the Expo 2020 bid, and is planning a comeback by coming up with the largest venue ever for a World Expo. Both countries are moreover pushing their credentials as would-be first-time expo host countries. In the 2020 Expo and 2023 Expo too, the winning countries (UAE and Argentina, respectively) used their first-time host status as selling points. Kazuhide Ishikawa, Japan’s ambassador in charge of the Kansai region, has warned that candidates looking to host for the first time make a compelling case.

Working tirelessly with Expo bid efforts right up to the last day

The 9 October 2018 edition of the Sankei Shimbun reported that Japan had attracted strong support in the Asian and Oceania regions, but that victory or otherwise will hinge on the extent to which it can drum up votes in Europe and Africa, which account for around 60% of the total votes. The bid committee members have split up into groups to

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visit different countries, stepping up their activities primarily in countries that have not yet nailed their colors to the mast, in order to broaden support for Japan's bid. These efforts have been steadily yielding fruit. On 28 October the UK indicated its support for Japan, and some observers expect this to influence voting to some extent both elsewhere in Europe and in African countries.

Osaka Expo expected to bolster the Japanese economy by around ¥2trn

If the Osaka Expo bid is successful, the event will be held for a period of 185 days from 3 May through 3 November 2025. METI expects around 30mn visitors to the Expo venue, compared with 22mn at the Aichi Expo in 2005. It moreover estimates that the Osaka Expo will provide a total economic boost of around ¥2trn to the country as a whole via construction costs, operating costs, and consumption expenditure (Figure 29).

Hosting the Expo is also likely to result in indirect boosts, such as market growth in areas related to the Expo concept, growth in corporate investment, growth in tourist and consumer demand beyond the venue itself and before and afterwards, as well as the staging of large-scale events timed to coincide with the Expo.

Fig. 29: Expected boost to the Japanese economy from the Osaka-Kansai Expo

METI estimates the economic boost to Japan as a whole at around ¥2trn

	Construction	Operating	Consumer
	costs	costs	spending
Total (final demand)	¥0.2trn	¥0.2trn	¥0.7trn
Total impact on Japanese economy	¥0.4trn	¥0.4trn	¥1.1trn

*Estimate assumptions

Venue infrastructure construction costs for the organizer Construction costs: (about ¥125bn)

Construction costs for participants (about ¥65bn) Operating costs: Administrative costs for organizer (about ¥83bn)

Administrative costs for participants (about ¥146bn) Expected no. of visitors: 30mn

Source: Nomura, based on report by METI's World Exposition Assessment Committee (7 April 2017)

Osaka Expo and Sumitomo Group

It has been broadly agreed that the construction costs for the Osaka Expo (¥125.0bn) will be split three ways between Japan's central government, the municipal and prefectural governments of Osaka, and the business community. If Japan wins the bid to hold the Expo, the next issue will be how to raise more than ¥40.0bn from the private sector, but according to a Nikkei article on 17 October 2018, Kansai Economic Federation chairman Masayoshi Matsumoto has indicated plans to focus money-raising efforts on Sumitomo Group companies, many of which hail from the Kansai region, and in particular the Hakusuikai (an association of the presidents of Sumitomo Group companies) (Figure 30). For companies, financial participation will mean higher costs, but is also likely to increase opportunities to provide their products or services.

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No ura | Japanese equities investment strategy (November 2018)

Fig. 30: Listed companies that belong to Hakusuikai

Hakusuikai is an association of Sumitomo Group company leaders

Code	Company
1821	Sumitomo Mitsui Construction
1911	Sumitomo Forestry
4005	Sumitomo Chemical
4203	Sumitomo Bakelite
4506	Sumitomo Dainippon Pharma
5110	Sumitomo Rubber Industries
5202	Nippon Sheet Glass
5232	Sumitomo Osaka Cement
5713	Sumitomo Metal Mining

Code	Company
5802	Sumitomo Electric Industries
6302	Sumitomo Heavy Industries
6701	NEC
8053	Sumitomo Corp
8309	Sumitomo Mitsui Trust Holdings
8316	Sumitomo Mitsui Financial Group
8725	MS&AD Insurance Group Holdings
8830	Sumitomo Realty & Development
9303	Sumitomo Warehouse

Source: Nomura, based on Nikkei article on 17 October 2018

Companies in region where the Expo will be held

Since the Expo will be held over a period of around six months, it will involve not only expenditure on the construction and operation of the venue, but also the spending by those visiting the venue. It is the region hosting the Expo that will probably feel the direct benefits of the economic boost from such spending. Here we look at the example of the Aichi Expo held in 2005. The BIE voted for Japan to host the Aichi Expo in June 1997, and the Aichi Expo was officially registered at the BIE's General Assembly in December 2000. We looked at the share price performance of companies with headquarters registered in the Tokai region. From this we can see that the companies concerned tend to outperform the TOPIX from the time when the Aichi Expo was officially registered through the actual hosting of the Expo (Figure 31).

Fig. 31: Share price performance of Tokai-based companies between the awarding of the Aichi Expo and the Expo itself

(End-Jun 97 = 0%)
80
60
40
20
0
-20
-40
-60
97	98	99	00	01	02	03	04	05	06
	Aichi chosen to			Aichi Expo officially				Aichi Expo	(CY)
	host Expo 2005			registered				held

Note: Chart plots the TOPIX-relative performance (straight average basis) of the 101 listed companies headquartered in the Tokai region that had a market capitalization of at least ¥10bn as of the end of June 1997 (the month in which Aichi was selected to host Expo 2005). Aichi Expo itself lasted from 25 March 2005 through 25 September 2005.

Source: Nomura, based on QUICK, TSE data

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Expectations could be high for the share price performance of Kansai regionbased companies

Referencing the timeline of the Aichi Expo, if the Osaka Expo gets the green light, we think official registration will follow at the BIE General Assembly at the end of 2020. Based on our above-mentioned findings, we expect companies in the Kansai region to start outperforming the TOPIX from around end-2020.

Synergies from combination of Osaka Expo and integrated resorts

Osaka Prefecture is aiming to open an integrated resort in Yumeshima in 2024 to coincide with the hosting of the Osaka Expo in 2025. If it is successful with its bid for the World Expo and the integrated resort, we expect synergies to result. In such a situation, the potential beneficiaries will likely be companies that own land or operate warehouses on Yumeshima or the neighboring area. Yumeshima will have to be redeveloped and infrastructure will also be needed to access Yumeshima, in addition to which we expect to see increased hotel demand (Figure 32).

Fig. 32: Examples of companies that could potentially benefit from redevelopment of

Yumeshima

	Code	Company	Details
	2874	Yokohama Reito	Has land for logistics facilities on Yumeshima
	9065	Sankyu	Has land for logistics facilities on Yumeshima
	9364	Kamigumi	Has land for logistics facilities on Yumeshima
	9025	Konoike Transport	Operates a warehouse near Yumeshima
	9066	Nissin	Operates a warehouse on Yumeshima
	9301	Mitsubishi Logistics	Operates a warehouse on Yumeshima
	9303	Sumitomo Warehouse	Operates a warehouse on Yumeshima
	1833	Okumura	Has already received orders for Yumeshima development
			work
	1893	Penta-Ocean Construction	Largest domestic player in offshore civil engineering; has
			already received orders for Yumeshima tunnel work
	9044	Nankai Electric Railway	Could be a means of access to Yumeshima; also develops
			hotels
	9045	Keihan Holdings	Could be a means of access to Yumeshima; also develops
			hotels
	9713	ROYAL HOTEL	Renowned Osaka hotel

Source: Nomura, based on company disclosures and Toyo Keizai data

Theme of Osaka Expo is people-focused

Osaka Expo has as its main theme Designing Future Society for our Lives, with two subthemes: How to Lead a Healthy Life in a Diverse Manner and Sustainable Socioeconomic Systems. The idea is to bring together in one place medicine and healthcare, sports and entertainment, and new businesses harnessing 21st century leading edge technologies such as artificial intelligence (AI) and virtual reality (VR), in order to show people from around the world the future shape of socioeconomic structures. Initially Osaka Prefecture had proposed a theme focusing on the challenges of health and longevity, but this was changed to a broader theme in order to appeal to younger people and emerging nations.

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Backdrop to the selection of the themes for the Osaka Expo

Osaka Prefecture is seeing an even faster pace of aging than the national average in Japan. However, Kansai has at the same time a high concentration of R&D institutions and companies involved in the global life sciences field. It was Dr Shinya Yamanaka, director of Kyoto University’s Center for iPS Cells Research and Application (CiRA), and winner of the Nobel Prize in Physiology or Medicine, that made a presentation at the BIE General Assembly.

Combination of cutting edge technology and life sciences lies at the heart of the Osaka Expo theme

Based on the aforementioned factors and the vision set out by Osaka Prefecture, we think that the combination of cutting edge technology and life sciences lies at the heart of the Osaka Expo theme (Figure 33). The life sciences field is moreover likely to receive a boost from the decision to award the Nobel Prize in Physiology or Medicine to Kyoto University Professor Tasuku Honjo (October 2018).

Fig. 33: Theme of the Osaka Expo: Designing Future Society for Our Lives

Healthy living, an inclusive society, and industrial innovation

Source: Nomura, based on Osaka Prefecture data

Companies related to the Expo theme

Attention is likely to focus on companies related to the themes of the Osaka Expo. The theme of the Aichi Expo was the environment. We looked at the share price performance of environment-related stocks from the date when the decision was taken to hold the Expo in Aichi, and found that they started to outperform the TOPIX from around the time that the Aichi Expo was officially registered (Figure 34).

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