【Open the door】 The shares are insufficient

April 11, 2021 (Sunday) Sunny

・There is a shortage of stocks: the Bank of Japan changed the supply-demand, a new-normal investment approach

“Structurally, short selling has become more difficult.”

For institutional investors, Yoshitaka Sakai of Asset Management One, who manages long/short funds in Japan, senses changes in the Japanese equity market.

Long/short is a strategy that sells overvalued stocks and holds long positions in undervalued ones, and short selling is indispensable in management.

Although performance is generally favorable, recently there is heightened nerve about selecting targets for short selling.

What underlies this is a change in demand structure in the Japanese stock market.

The Nikkei Stock Average rose 16% in 2020, the year of the COVID-19 pandemic. Yet during that period, foreign investors sold 6 trillion yen in both spot and futures.

Despite foreigners accounting for about 70% of trading value on the Tokyo Stock Exchange selling heavily, the Japanese stock market rose.

・There is a shortage of stocks: the BOJ changed the supply-demand, a new-normal investment approach

The first change that creates upward pressure on stock prices is the BOJ’s purchase of exchange-traded funds (ETFs) by <8301> [Close 36,900 yen].

The BOJ began purchasing ETFs in 2010 and has continually bought Japanese stocks through ETFs.

What investors in the public expect is that when stock prices fall, ETFs will buy and support the downside.

The key point is that the BOJ is a主体 that does not release stocks.

Having started purchasing ETFs more than 10 years ago, the BOJ has never sold ETFs.

The market value of ETFs held by the BOJ has exceeded 50 trillion yen.

From the perspective of the stock market, the BOJ currently appears to be a net absorber of stocks.

・There is a shortage of stocks: the BOJ changed the supply-demand, a new-normal investment approach

The second change is that more listed companies are buying back their own shares.

With governance reforms progressing, listed companies have become a force that absorbs shares from the market.

On the other hand, actions such as selling own shares that effectively dilutes are increasingly avoided.

Some “scarce stock” prices are soaring, reflecting the current reality of the Japanese market.

・There is a shortage of stocks: how to navigate the “squeeze market”

As the Nikkei Average again tests 30,000, supply and demand between buyers and sellers are becoming a stronger source of stock price determination.

BOJ <8301> [Close 36,900 yen] buying, and corporate buybacks reduce the number of shares circulating in the market, resulting in a squeezed (constrained) stock market.

A market structure that tends to lead to stock prices rising when you squeeze the content out of a mayonnaise bottle with your hand is becoming established.

・There is a shortage of stocks: how to navigate the “squeeze market”

Low-floating shares—turn risk to your advantage, stocks prone to fluctuations, select based on earnings

Main stocks with expected earnings growth and low free float

Prologis <7034> [Close 3,245 yen] Free float 0.19%, expected P/E 40x, earnings growth 93.7%

Fast Retailing <9983> [Close 87,890 yen] 0.2% 56.4x 40.4%

NSSOL <2327> [Close 3,730 yen] 0.25% 20.1x 16%

Askul <2678> [Close 4,135 yen] 0.25% 29.8x 23.8%

Tokyo Kikinzai <4745> [Close 648 yen] 0.25% 9,999.9x 5.6%

ZHD <4689> [Close 545.9 yen] 0.28% 42.9x 40%

・There is a shortage of stocks: stock prices are high, but individual investors remain cautious

“Buy when prices fall”—accumulating capacity remains

BOJ <8301> [Close 36,900 yen] and corporate support have helped keep high levels, sustaining a high market

With many individual investors entering the market after seeing stock gains, opinions that a turning point is near are increasing.

But overall demand in the market suggests that individual overheating may be more limited than expected.

Three indicators support this.

First, the ratio of margin buying to market capitalization. The margin buying balance is over 3 trillion yen, at its highest in two and a half years.

However, when viewed relative to market capitalization, the level remains roughly flat. Compared with the pace of stock price increases, individual risk-taking in margin purchases has not progressed.

Second, the trend of individual waiting funds. Money Reserve Funds (MRFs) stand at 14 trillion yen, a new record.

Third, the number of bearish-type ETF units. If the Nikkei Average falls by 1%, the price rises by 2% in the opposite direction

Nikkei Double Inverse <1357> [Close 399 yen] about 600 million units outstanding, a record high, showing individuals remain inclined to the market.

Taken together, individual investors’ risk-taking remains constrained.

The large amount of waiting funds also suggests they are prepared to “buy when prices fall.”