Japan: Best and Worst Performing ADRs Last Week and YTD

Japanese ADRs trading on the NYSE/NASDAQ recouped some of their losses from two weeks ago. Financial stocks were strong, signaling a possible bottoming out, led by a 10-plus percent move to the upside by Mizuho FG (MFG).

The Nikkei 225 rallied for a third straight Monday (5/28), but in the prior two it has failed to advance for the week.

Blue chip exporters will at least have support with the yen possibly trading towards 122 against the US$.

On average, the 28 Japanese ADRs gained a combined 1.1% last week. They are down a combined average 0.1% for the year.

Average weekly Japanese ADR returns over the past several weeks:

05/11 - 05/18: -2.6%
05/04 - 05/11: +0.4%
04/27 - 05/04: +0.6%
04/20 - 04/27: -1.8%
04/13 - 04/20: +1.5%
04/05 - 04/13: -2.1%
03/30 - 04/05: +1.3%
03/23 - 03/30: -1.6%

The five best performing ADRs last week:

1. Mizuho FG (MFG) 10.8%
2. Internet Initiative Japan (IIJI) 5.2%
3. Mitsubishi UFJ (MTU) 4.5%
4. NEC (NIPNY) 4.4%
5. Matsushita (MC) 4.0%
    Nidec (NJ) 4.0%

The five worst performing ADRs:

1. Konami (KNM) -4.9%
2. NTT DoCoMo (DCM) -2.0%
    Wacoal (WACLY) -2.0%
3. ORIX (IX) -1.7%
4. NTT (NTT) -1.5%
    Toyota (TM) -1.5%
5. Canon (CAJ) -1.3%

See the chart below for weekly and year-to-date returns.

Disclosure: The author owns shares of NIS Group and IIJ and also owns IIJ call options.

Click to enlarge chart

Nissan (NSANY) was the clear favorite among auto stocks, over Toyota (TM) and Honda (HMC), which both still trade down double-digits for the year. Nissan is liked among Japanese investors for its 2.5% yield, plus given its struggles, it trades at a relatively more attractive valuation.

Mitsubishi UFJ (MTU) and Mizuho (MFG) continue to face operating challenges in the abnormally low interest rate environment and slow stock market (compared to the gains the U.S., Europe and Asia). That said, their shares are likely being bought in anticipation of greater shareholder returns from dividends and buybacks. Some seem to think there is limited downside risk given their prolonged laggard performance.

Internet Initiative Japan (IIJI) rallied back and added another 7.25% Monday (5/28). Patience is necessary with many smaller caps, which despite their growth potential, have low valuations.

In Japan Investment's latest newsletter (5/23), an explanation is offered as to why Japanese stocks are not joining the near-global stock rally:

Foreign stock markets are rushing ahead to new highs and Tokyo stays dead flat, why?

I. The Tokyo Stock Exchange's current supply-demand situation easily explains the current level. In fact, most Japanese institutional investors have consistently sold since autumn 2006; domestic capital flows are focusing on BRICs new investment trusts (over the top I believe).

II. Onshore investment trusts focusing on long-only Japanese equities are experiencing net outflows of capital. Looking at January-April, the Japan Investment Trust association, or Quick QBR, statistics clearly show ¥530 billion net capital outflow from Japanese long-only equity investment trusts.

III. On the other hand, for the same period, there was a net inflow of ¥2.55 trillion in foreign equity long-only type investment trusts. The yield gap between Japanese and foreign equities investment trusts lead to simple arbitrage, no surprise Japanese pension funds were also net sellers; investment trusts have been net sellers for nine months in a row.
(Minor edits were made to the original text for style and formatting purposes.)

The report goes on to say TSE data shows life and non-life insurers and city and regional banks were all net sellers of Japanese for the five months up to this month. Overseas investors have more often than not been buyers, but domestic retail investors are more mixed, apparently buying on sell-offs and taking profit quickly on rallies.

One bullish note however, is a "Japanese equities investment fever" taking place among Asia's wealthy, as they increase their allocations to Japan.