Japan Market Comment & Outlook

The figures from Healios (4593) and Sosei Group (4565) were not well received by investors, and the respective stocks lost 12% in the case of Healios and around 5% in the case of Sosei Group since the release of the numbers. On the other side of the spectrum, we see companies like GMO Payment (3769), which announced a rather moderate outlook, yet the stock still advanced by 13% (more on this under "Stocks in Focus"). A major topic in Japan is the stimulus package from the new government under Prime Minister Kishida. Initially estimated at ¥35 trillion and later ¥55 trillion, the package is now expected to be closer to ¥79 trillion, according to the Nikkei Shinbun. Long-time market observers in Japan understand this, particularly in light of the stimulus packages from the 1990s, which ultimately only provided short-term boosts to the stock markets but did not sustain economic growth and rather fizzled out. In the current environment, I see this stimulus package more as good support for the market, which is also reflected in the development of the Topix index (see chart below). The long-term trend channel remains intact, and the red support line appears stable. Additionally, if we consider the technical aspect, the 200-day moving average at 1,960 index points has repeatedly served as good support. There is little reason to believe that the market won't aim for its yearly high of 2,120 index points again.

Topix Value vs. Topix Growth: The long-term trend seems to be continuing into 2021. While value stocks are still performing better this year (20.3% vs. 17.1%), the gap has narrowed since mid-September (when it was 22% vs. 13%), not least due to the announced stimulus package, which has boosted growth stocks like Mercari (4385). In the long-term comparison, the outperformance of value stocks has become even more pronounced, with growth outperforming value by more than 3x (67% vs. 20% over the past five years).

The clear sector winner over the past month was Electric Appliances, which gained around 10%. Sony (6758), with an index weight of 16%, and Tokyo Electron (8035), weighted at 7%, were the clear drivers. The strong earnings numbers from index members like Screen (7735) and Hosiden (6804) also helped. Precision Instruments, now with a 21.5% year-to-date performance, deserves mention as the second sector winner. Compared to a month ago, this sector improved by 5% and now ranks 9th in the sector ranking (up from 16th place the previous month).

Mercari (4385): The stock reached a new all-time high today. The quarterly figures showed better-than-expected revenue, and the upcoming stimulus package likely contributed as well. Japan's still underdeveloped digitalization offers considerable growth potential. From a chart-technical perspective, the stock is at the upper end of the short-term trend, but longer-term, the ¥8,400 mark is certainly within reach. There are two outstanding convertibles, issued in June this year. A 5-year and a 7-year bond, each with 78% parity and a premium of around 45% (compared to 54% at issuance). At a share price of ¥8,400, assuming all other parameters remain unchanged, the fair value would increase by 8%, and the delta would rise by 15 points (from the current 47 to 62 in the case of the '26 convertible).

GMO Payment (3769): Another stock in the digital consumption space is GMO Payment. The reported figures exceeded expectations, with a net profit of ¥8.8 billion (compared to an expectation of ¥7.9 billion), and the outlook was also raised. Chart-technically, the stock has room to grow within the longer-term trend channel, although the RSI at 76, due to the strong advances in the past two weeks, suggests a rather toppish situation. I see significant medium- to long-term potential here, although short-term consolidation cannot be ruled out due to the overbought condition. The outstanding convertible with a 0% coupon and maturity until June 2026 is trading at 92 parity and a 28% premium (compared to 40% at issuance in June this year) at a price of 115.80. If the stock moves to the upper end of its longer-term trend channel (around ¥19,000), the fair value would increase by about 9%.

Disclaimer: The opinions expressed in this market commentary reflect only the views of the author and are in no way intended as recommendations for buying or selling. Holinger Asset Management disclaims any liability for losses that may result from trading activities in stocks, indices, convertible bonds, or other financial instruments mentioned in this market commentary.