Investors return to Japan, but construction is patchy

Though it has already been spoken of, we can prove that investors did indeed “buy” Japan quickly after the earthquake. We have also looked at positive and negative investor sentiment to see if people are making the obvious plays such as buying those firms due to benefit from reconstruction. As we will see, the situation is not quite as simple as it sounds with plenty of short selling in construction companies. Stocks included are: Nippon Yakin Kogyo (TYO:5480), Nippon Steel (TYO:5401), Taiheiyo Cement (TYO:533), Nippon Concrete Industries (TYO:5269), Sumitomo Osaka Cement (TYO:5235), iShares MSCI Japan (TYO:EWJ).

Investors did indeed quickly buy Japanese equities after the price fall and we can pinpoint the extent to which it was international institutional investors behind this. Pre earthquake, international investors who lend (although we do capture an element of local behavior) owned a touch over 10.5% of the Nikkei 225. This dropped to 9.8% within days of the disaster only to rebound even faster to a higher level of 11.25%. Funds continue to hold more Japanese large caps than they did pre tsunami and it is trending slowly higher. Another reason institutional ownership may continue to rise is the relative weakness of the Yen.

An alternative way to gain exposure to a rising Japanese market is via an ETF such as the iShares MSCI Japan. The amount of this ETF in lending programs trebled in response to the crisis and this is likely to have been due to the issuer creating more of it to meet demand as well as funds buying it. It remains quite heavily borrowed with 7% of the issue value on loan.

Over the last two weeks some of Japan’s steel related companies are seeing predictable investor behavior. Nippon Yakin Kogyo provides stainless steel and pipes and it scrapes into the list of the 10 Japanese equities with the most positive investor sentiment over the last fourteen days. Short interest had actually risen post earthquake, but has come down to 4% while funds who lend now own 3.6% of this small cap company which is a 12 month high after a recent buying surge.

Nippon Steel has suffered from a falling share price pre and post the disaster in March, but the recent behavior offers some hope, with the small amount of short selling being closed out to almost zero. Institutional investors have been buying, taking their holdings to 6% of the company, which is a 6 month high.

One would have thought that the cement related companies would be odds-on to be in favor given the need for their product to rebuild huge parts of north Japan. However, there are two rather serious headwinds. Both Sumitomo Osaka Cement and Taiheiyo Cement are dealing with damage to their distribution network (the port) and damaged plants respectively. Short sellers may be opportunistically shorting these companies with Sumitomo Osaka Cement showing 5% of its shares on loan (just off an annual high) while short interest in Taiheiyo has spiked to 9% of total shares. Institutional investors, being less worried about the short term, have added Sumitomo Osaka to their long term portfolios but they are selling Taiheiyo.