In Struggling Japan Market, Beware the Small Caps
In Struggling Japan Market, Beware the Small Caps
(Bloomberg) -- Japan’s new Reiwa era has not gotten off to a great start for traders in Tokyo.
They returned from an extended Golden Week holiday only to be greeted by renewed hostilities between the U.S. and China, which put equities across the region under pressure. The Topix index has sunk about 4% since May 7, wiping out more than half its year-to-date gains in just over two weeks.
Today’s trade data didn’t offer much cause for optimism either. Japanese exports fell for a fifth straight month in April -- the month before U.S.-China talks fell apart -- thanks to slowing global trade and a lull in the tech cycle. Shipments abroad declined 2.4% in April from a year ago, worse than economists’ forecasts.
While there’s certainly enough doom and gloom to go around, a darkening corner of the Japanese market is the performance of Japan’s small caps.
“The investment outlook for small caps is bleak in the current scenario as both internal and external factors put downside pressure on prices,” Societe Generale SA strategists including Frank Benzimra, wrote in a note Tuesday.
The MSCI Japan Small Cap Index has fallen 3.4% since the end of the first quarter, compared to a 1.4% decline in its larger-capitalized counterpart. An increase in volatility, deteriorating balance sheet quality and concerns about a consumption tax hike later in the year have hit sentiment toward smaller companies.
Japanese small caps tend to be skewed toward consumer stocks, which are particularly vulnerable to any slowdown in consumer spending the tax hike may cause, the strategists said.
“In these circumstances we would favor domestic cyclicals to navigate weaker exports, trade disputes and an appreciating currency,” they wrote.
Stock Market Summary
- MSCI Asia Pacific Index ex-Japan up 0.1%
- MSCI Asia Pacific Index little changed
- Japan’s Topix index little changed; Nikkei 225 up 0.2%
- Hong Kong’s Hang Seng Index up 0.2%; Hang Seng China Enterprises little changed; Shanghai Composite little changed; CSI 300 little changed
- Taiwan’s Taiex index up 0.2%
- South Korea’s Kospi index little changed; Kospi 200 little changed
- Australia’s S&P/ASX 200 little changed; New Zealand’s S&P/NZX 50 little changed
- India’s S&P BSE Sensex Index up 0.3%; NSE Nifty 50 up 0.2%
- Singapore’s Straits Times Index up 0.2%; Philippine Stock Exchange Index up 0.6%; Jakarta Composite down 0.2%; Thailand’s SET up 0.6%; Vietnam’s VN Index up 0.6%
- S&P 500 e-mini futures little changed after index closed up 0.8% in last session
To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Tom Redmond
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