Reasons why the Nikkei Average's theoretical value of 25,214 yen will not be reached, foreigners' cumulative net buying in the spot market has declined — Mr. Tetsuo Inoue
Last week’s “Trend 914” stated that the theoretical value of the Nikkei Average if all foreigners’ current futures short positions were to be bought back would be 25,214 yen, but I will discuss the “spot” and “valuation” that were cited as grounds for why it cannot rise to that level.
Graph 1
First, regarding the spot movements, according to the Tokyo Stock Exchange’s weekly flow by participant announced every Thursday, it has been found that foreigners have continued to buy Japanese stocks (cash) through the week up to 11/15 for seven weeks. The seven-week cumulative net buying amounts to 1,799.4 billion yen, but in fact in the first week they bought cash by 114.9 billion yen while selling 508.6 billion yen in futures, and as a result the Nikkei Average fell by 468 points that week, or 2.1%. In the following six weeks, foreigners cumulatively bought cash totals of 1,684.5 billion yen and futures totals of 1,517.1 billion yen, a combined 3,201.6 billion yen, which suggests the Nikkei Average rose by 1,893 points, or 8.8%.
Over six weeks, 3,201.6 billion yen means an average of more than 500 billion yen bought per week, but this amount greatly exceeds the past “practical definition” I wrote that when the weekly slope of foreigners’ buying and selling exceeds 200 billion yen, it affects the index.
Now, this spot buying has brightened market sentiment, and Japanese stocks are among the world’s cyclical stocks (to be discussed later), and because globally the manufacturing sector is at a bottoming-out phase, some argue that foreign buying will continue for the time being, but I have greater doubts about that.
Graph 1 shows the cumulative net cash buying by foreigners since the start of the Abenomics rally; even though 1,799.4 billion yen was bought in seven weeks, it is obvious that this power is not enough to reverse the trend of Japan’s stock disconnection that has persisted since early last year, and thus cannot be judged at this point.
The peak of Japan’s stock position occurred a couple of months before the Shanghai shock in the summer of 2015 (August), and the current peak balance of 21 trillion yen is now only about one third.
However, there has been only one past instance where foreigners increased their purchases again in a scenario marked by a red arrow in the graph; at that time, two factors were involved.
One was the Bank of Japan’s decision to double the annual ETF purchase cap from about 3 trillion yen to 6 trillion yen. And the other was, for the first time in thirty years, two rounds of upward revisions.
What this is illustrating is Graph 2’s trend in EPS (earnings per share) for the U.S., Japan, and Europe. (To be continued)
Graph 2
Written by Hayakawa
