Japan was by some stretch the worst performer among major stock markets in February. The Topix fell 10.3%, as investors responded first to shockingly poor GDP figures for Japan in the last quarter - and then for the likelihood of even worse numbers to come.
Investors can counteract that downward pressure with some smart stock selection. March marks the start of the run-up season for shares that are due for inclusion in the JPX-Nikkei 400: Japan's smartest index.
The index adjusts its 400 constituents at the end of August every year. The exact constituent changes are due to be announced on Aug. 7, based on data from the end of June. But investors should prepare now, and select the stocks due for inclusion.
Nomura has been running the numbers on which companies are likely to get included, and which are likely to get kicked out. Between March and July, stocks due for inclusion normally outperform the market by about 7%, while companies removed from the index underperform by about 8%.
Why? There is ¥4.4 trillion (US$41.0 billion) in assets that track the index. Inclusion forces the hand of the managers of those funds. Nomura calculates that stocks due for inclusion gain some 5.5 day's worth of liquidity, while exclusions lose some 4.1 days of liquidity.
There are six stocks that would rank in the current top 220 of stocks by market capitalization. The index is market-cap weighted, but adjusted for the free float of companies' shares. That current ranking (which I give in parentheses) should ensure their inclusion. Some of the companies are affected by the current virus scare, which is hitting both China and Japan hard. Investors may want to wait but pull the trigger if those worries clear.
Acom (ACMUY) (38) is a consumer lender that is 36.7% owned by Japan's biggest bank, Mitsubishi UFJ Financial Group (MUFG) . Faced with slow growth at home, it has been expanding its personal-loan business in other faster-growing Asian markets such as Indonesia, the Philippines and Thailand. OK, so they're licensed loan sharks, offering pay-day advances to people in places with sunny weather and spicy food. Vietnam is next on its list of destinations.
Sharp (SHCAY) (40) is the storied electrical-appliance manufacturer, which has fallen on hard times. It's now controlled by Apple's (AAPL) largest parts supplier, Hon Hai Precision Industry (HNHPD) , better known as Foxconn. Far gone are the days when the Sharp name graced the shirts of Manchester United (MANU) , one of the first big-name sports-shirt sponsorships - their place is currently taken by the General Motors (GM) marque Chevrolet. Sharp is attempting to change a culture that allowed it to slip into irrelevance. Case in point - the company said on Monday it would be making surgical masks at an old TV plant in Mie Prefecture. TV screens are made in germ-free environments, so it's tweaking a line to make hot-selling face masks. Perhaps of longer-term interest to investors, Sharp will be the first Japanese manufacturer to make a 5G handset, the Aquos R5G. The handset will be ready for sale this spring right as Japan rolls out 5G service, which lets you download a two-hour movie in about 4 seconds.
Kyushu Railway (KYHHY) (126) is the train-tracks operator for the island of Kyushu, in Japan's southwest. It has a construction and property kicker, building and operating the space around its stations. The island is an industrial hub for auto parts, chemicals and computer chips, centered around the city of Fukuoka. The company, which only went public in 2016, may be a stock best left untouched for now, since transportation shares have been battered the hardest by the Covid-19 scare. Once those doubts clear up, the rail line should perform like a mix of a transport stock with a utility. There are high barriers to entry in the rail business anywhere, but particularly among the consumer-safety specialists in Japan. The company, part of the Japan Railways or "JR" Group, was formed in the 1980s when Japan split apart its railroad monopoly, but only privatized with the 2016 IPO.
Mitsubishi Motors ( (MMTOF) ) (140) is 34.0% owned by Nissan Motor (NSANY) , and third wheel in the Renault-Nissan-Mitsubishi alliance, with Renault and Nissan holding shares in each other. The Japanese companies have had massive obstacles placed in the path of their production lines. Boulders put there, basically, by themselves. Mitsubishi was caught in 2016 fabricating fuel-economy testing data, and in the early 2000s was caught covering up defects that led to cars with failing brakes and faulty clutches. Mitsubishi has largely been spared the fallout in the firing of Carlos Ghosn, the founding chairman and CEO of the alliance. Mitsubishi has a U.S. hit on its hands with the Outlander crossover SUV, which in February led to its strongest U.S. sales for that month since 2004. It's trying to ramp construction at two factories in China back up after delays due to the coronavirus, with getting employees back to work. Worth watching how the company's manufacturing in China and Japan contends with parts shortages.
Fukuoka Financial Group (FKKFY) (209) is a regional bank, also with a network on the island of Kyushu. Besides Fukuoka, it controls the banking business in the other major cities of Japan's third-largest island, such as Nagasaki. The banking group is likely to suffer while yields on Japanese financial instruments are so low. However, it is worth watching what kind of stimulus the central Bank of Japan works into the world's third-largest economy. Although regional banks are best avoided in Japan, Fukuoka Financial has been attempting to streamline operations. A three-year struggle to merge its subsidiary Shinwa Bank with local rival Eighteenth Bank, a deal held up by now-addressed monopolistic concerns, are now slated to come to fruition in October.
Sushiro Global Holdings T:3563 (220) unfortunately does not have an ADR, unlike the other large companies due for index inclusion. It's one of Japan's biggest chains of conveyor-belt sushi restaurants called, yes, Sushiro. This is another stock perhaps best avoided until the Covid-19 scare passes, which has led to its 500 or so outlets in Japan being way underpopulated. Cheap eats should then return as quickly as its dishes shoot around on its system, which delivers and whisks away plates to your booth. Besides Japan, it also has 14 branches in South Korea and 11 in Taiwan. Oh and it opened its first store here in my hometown, Hong Kong, last August, with another branch in Singapore and plans for further Asian expansion.
Why is the JPX-Nikkei 400 the index in Japan to watch? The JPX-Nikkei 400 lost 10.0% in February, slightly better than the 10.3% fall in the Topix, and should rebound faster than other Japanese stocks.
The index selects the best Japanese stocks in terms of their appeal to overseas investors. These are the outward-looking Japanese companies, the ones that measure up to global investment standards. The components are scored on their commitment to producing shareholder returns, and to governance issues such as independent directors, reporting standards, and disclosing figures in English.
Those factors haven't always been at the forefront of mindshare for Japan Inc. Japanese companies have for decades been run for their customers, financiers and employees, with shareholders an afterthought after the needs of those constituencies were met.
That's changing, and Japan is in the process of overhauling its corporate-governance requirements. Institutional shareholders, who have traditionally simply gone along with management on decisions, are also being encouraged to actually vote their shares and express greater oversight over the companies they co-own.