Dark Days Set In for Nikkei 225 as Fast Retailing, SoftBank Drop

(Bloomberg) --

Blue chips once coveted for their high growth potential are bearing the brunt of the rout in Japan’s stock market due to the impact of the coronavirus.

Fast Retailing Co., SoftBank Group Corp. and Tokyo Electron Ltd. have each fallen at least 30% since the outbreak started crushing markets earlier this year. The large caps have dragged down the Nikkei 225 Stock Average due to their high weightings in the blue chip gauge. The NT ratio, which measures the Nikkei 225’s performance relative to the benchmark Topix index, fell to 12.9 times Thursday, its lowest level since August 2018.

“A lot of money went into these stocks despite being expensive because people thought their valuations would hold, given their high growth potential,” said Norihiro Fujito, the chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “That’s being reversed all of a sudden.”

Fast Retailing accounts for the largest proportion of the price-weighted Nikkei 225, with a weight of about 8.7%. Tokyo Electron has a weighting of 3.6% and SoftBank Group 3.5%.

News flow hasn’t been kind to growth-oriented trio. Fast Retailing said on Monday it will temporarily close all 50 of its Uniqlo stores in the U.S. due to the coronavirus outbreak, while S&P Global Ratings cut its credit rating outlook on SoftBank to negative on Tuesday, citing the broad market declines. Tokyo Electron, which manufacturers chip-making equipment, has been hit by concerns over semiconductor demand and supply chains.

The Nikkei 225’s underperformance of the Topix is being exacerbated by the Bank of Japan’s move on Monday to increase its purchases of ETFs in an effort to bolster the market. The central bank in 2016 began to shift to more buying of funds linked to the broader measure and away from the blue-chip gauge. The Nikkei 225 lost 5% in this holiday-shortened week while the Topix gained 1.7%.

Read more: BOJ’s $112 Billion ETF Target Boosts Topix Index Over Nikkei 225

“When foreigners sell Japanese equities, the selling is concentrated in Nikkei 225 futures, which have much higher liquidity,” said Keiichi Ito, chief quants analyst at SMBC Nikko Securities Inc. in Tokyo. “It’s easy for stocks with a big gap in their weightings in Topix versus the Nikkei 225, with high weighting on the latter, to be impacted.”

Foreigners were net sellers of nearly 3 trillion yen ($27.4 billion) worth of Japanese stock futures over the five weeks ended March 13, versus outflow of about 1.3 trillion yen in the cash market.

MUFJ-MS’s Fujito cites Toyota Motor Corp., Sony Corp., Nintendo Corp., Hoya Corp. and Keyence Corp. among large-cap stocks with little or no weighting on the Nikkei 225 as those that are likely to outperform under current circumstances.

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