One Uniqlo Share for $1,000 Sparks Concern Over Nikkei Dominance
(Bloomberg) -- Shareholders are cheering the record share price of Fast Retailing Co., the operator of casual fashion giant Uniqlo that’s just become the most valuable apparel retailer in the world.
But some other market observers are sounding notes of caution over the stock’s ever-increasing influence on Japan’s Nikkei 225 Stock Average, as technical changes caused by its recent highs raise its already-outsized impact on the blue-chip gauge.
A fivefold increase in Fast Retailing’s tick size -- the minimum amount by which the stock can move up or down -- and a surge in its weighting in the index mean the Nikkei’s rise is increasingly intertwined with that of the casual clothing firm, even as Japanese stocks look to test record bubble-era highs. The Nikkei broke the 30,000 barrier this week, returning to that level for first time since 1990.
Fast Retailing has risen about 80% in the past 12 months and the price per share broke the 100,000 yen ($946) level on Tuesday, making it the only listed company in Japan to trade at such a value. That triggered a technical change, as under Japan Exchange Group Inc. rules the tick size on stocks trading above 100,000 yen jumps to 50 yen.
“Each step gets bigger. Up to 99,999 yen it only moved 10 yen a tick,” said investor Taketsugu Agari. “The Nikkei 225 may become ever-more dominated by moves in Fast Retailing.”
In the last six months alone, the apparel maker has contributed more than 1,600 points to the Nikkei 225, single-handedly responsible for nearly a quarter of the index’s 31% gain in that time. The shares briefly touched a record high Friday morning before ending the day 2.4% lower, contributing nearly half of the Nikkei’s 0.7% drop.
Junichi Hashimoto, senior quants analyst at Daiwa Securities Co., says that while the tick size is unlikely to be an issue in the short term, it could be a concern over longer periods. “If the price is consistently high, when it falls the impact will be greater, and the volatility could increase,” he said.
That’s further compounded by Fast Retailing’s outsized weighting on the index. The Nikkei 225 is a price-weighted gauge, meaning that the arbitrary price of an individual share determines how much of the index a company makes up. At 100,000 yen a share, Fast Retailing is a giant.
That weighting stood Thursday at a record 12.8%, higher than the largest weighting on any other developed market benchmark. While Fast Retailing has been the dominant force on the Nikkei 225 for a decade, its proportion on the index has surged along with its share price, forcing passive investors to buy more of the stock as the Nikkei gains.
The biggest stock on the Dow Jones Industrial Average, UnitedHealth Group Inc., makes up 6.8% of that price-weighted measure. On Japan’s broader Topix index, Fast Retailing is the 41st largest weighting, making up just 0.5%.
That has sparked concern among some such as Takashi Ito, a senior strategist at Nomura Securities Co., who notes that what goes up could also come down -- fast.
“If long-term investors change their outlook and decide to cut back on their holdings of Fast Retailing, then the Nikkei 225 could unravel pretty rapidly,” he said.
But Fast Retailing has long demurred on the idea of splitting its shares. In response to questions from Bloomberg News, the company said that it wasn’t considering a stock split, directing investors to a periodic statement on the appropriateness of the size of its investment units.
Still others are less concerned about what’s long been known as an issue with price-weighted measures such as the Nikkei. Makoto Sengoku, a market analyst at Tokai Tokyo Research Institute, argues that criticism of Fast Retailing for skewing the Nikkei 225 “isn’t anything new.”
“You also have to give credit to Fast Retailing for having reached this share level,” he said.
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