Nikkei 225 Deformed as Japan Yardstick by Fast RetailingMasaaki Iwamoto and Lu Wang
The Nikkei 225 Stock Average, the benchmark measure for Japanese equities, is being twisted by a single company more than at any time in the last 12 years.
Fast Retailing Co., Asia’s biggest apparel retailer, was responsible for almost a sixth of the gauge’s 49 percent advance in the last two years, according to data compiled by Bloomberg. At 10 percent of the Nikkei 225, the clothier has almost twice the combined influence of Toyota Motor Corp., Mitsubishi UFJ Financial Group Inc, Honda Motor Co., Japan Tobacco Inc. and NTT DoCoMo Inc., Japan’s five biggest companies by market value.
The skew in the Nikkei 225 caused by a single company underscores the difference between stock averages, where ranking is determined by a share price, and most indexes, where market capitalization is key. The 62-year-old equity benchmark, owned by Nikkei Inc., is the most common benchmark for pricing derivatives on the country’s $4.39 trillion equity market. Open interest for June Nikkei 225 futures stood at more than $96 billion on April 26, according to data compiled by Bloomberg.
“The Nikkei 225 is deformed,” said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co., the brokerage unit of Japan’s biggest financial group by market value. “It doesn’t properly reflect the Japanese equity market even though the Nikkei is well known and most attention is paid to it.”
Fast Retailing, operator of the Uniqlo chain of clothes stores, skews the index so much that Mitsubishi UFJ, PineBridge Investment Japan Co. and Bayview Asset Management Co. say it’s no longer an effective gauge of the nation’s equity performance. No company has had as much influence since at least 2000, when Bloomberg began collecting the data.
Fast Retailing’s share price, which closed at a record 35,700 yen ($365) on April 26, may also be distorted because the stock can be used to move the Nikkei 225, according to Makoto Kikuchi, chief executive officer of Myojo Asset Management Japan Co., a Tokyo-based hedge-fund advisory firm.
“Proprietary traders at brokerages might be trading Fast Retailing to manipulate the Nikkei,” said Kikuchi. “One single company having such a huge impact on the index is problematic and the index compiler has to address this issue.”
In the first four months of this year, the Nikkei 225 moved in the same direction as Fast Retailing 13 out of 17 weeks, according to data compiled by Bloomberg. The clothier’s contribution to the Nikkei 225’s move accounted for an average 42 percent of the net gain or loss during those weeks, the data show. The Nikkei 225 advanced 4.3 percent to 13,884.13 last week, taking its year-to-date gain to 34 percent.
The yen-denominated Nikkei 225 would have closed lower instead of higher in the week ended Feb. 15 if not for Fast Retailing, Bloomberg data show. The measure’s 21 yen advance would have become an 11 yen retreat without the clothier’s 32 yen contribution, the data show. The gauge fell 0.2 percent today while Fast Retailing was unchanged.
Nikkei Inc. is aware of the issues relating to Fast Retailing’s weight in the measure, the company said in a faxed response to questions. Fast Retailing declined to comment on the stock’s role in the Nikkei 225, spokesman Keiji Furukawa said.
On days when listed options on the Nikkei 225 are settled, Fast Retailing’s volume surges an average of 3.1 times compared with the 30-day moving average, according to data for the last year compiled by Bloomberg. On March 8, a settlement date for listed options, the Nikkei 225 closed above 12,000 for the first time since September 2008. The clothier capped a 24 percent advance that week as volume surged to the highest in two years.
Trading volume in Fanuc Corp., the second-heaviest company in the gauge at 4.5 percent, doubles versus the 30-day moving average on those days, the data show. For the Nikkei 225 as a whole, volume increases about 30 percent, while for Sojitz Corp., the company with the smallest weighting, it rises just 10 percent on average.
The Nikkei 225 is a price-weighted stock average that’s been calculated daily since 1950. Its methodology is based on similar calculations to those underlying the 30-member Dow Jones Industrial Average, according to compiler Nikkei Inc.
Japan’s alternative equity benchmark, the 1,698-company Topix Index, uses market capitalization for rankings, much like the Standard & Poor’s 500 in the U.S. Toyota, the country’s largest company by value, is the biggest at 4.6 percent. Fast Retailing ranks No. 50 in the Topix.
“I tend to look at the Topix more than the Nikkei,” Chris Konstantinos, who helps oversee $3.65 billion as director of international portfolio management at Riverfront Investment Group LLC in Richmond, Virginia, said in a phone interview on April 23. “The more diversified a benchmark is, the more relevant it is. It’s the same reason that the S&P 500 is a more robust benchmark than the Dow Jones.”
At $194.31 a share on April 26, International Business Machines Corp. is the highest priced stock in the Dow, making up 10 percent of the gauge. In the S&P 500, the top 10 percent is divided among the five largest U.S. companies by market value and IBM isn’t one of them.
While the Nikkei 225 and the Dow may not reflect the whole market, their compilers shouldn’t alter the methodology because there’s a need to keep historic data consistent, Konstantinos said. The Dow was developed in 1896, six decades before the S&P 500 began. The Topix began on Jan. 4, 1968.
“A big change in weighting renders the historical analysis less relevant, less useful, and potentially biased,” Konstantinos said.
When Fast Retailing joined the Nikkei 225 on Aug. 26, 2005, it had an initial weighting of 2.7 percent, the fourth-largest at the time. The shares have risen more than fourfold since then, with a commensurate expansion in its influence.
Fast Retailing’s valuation, at 39 times estimated earnings, may also be distorted, according to Ichiro Takamatsu at Tokyo-based Bayview Asset. The company trades for more than twice global rival The Gap Inc.’s 15 times. Hennes & Mauritz AB, operator of H&M stores, is priced at 21 times future earnings and Spain’s Inditex SA, owner of the Zara brand, trades at 24 times.
Fast Retailing founder and Chairman Tadashi Yanai, 64, is the biggest investor in the Tokyo-based company, controlling 46 percent of the outstanding shares. He is Japan’s richest man with a net worth of $18.1 billion, according to the Bloomberg Billionaires Index.
The average of analysts’ price targets is 27,592 yen as of April 29, 23 percent lower than where Fast Retailing closed April 26. The current share price is ‘strange’ in light of its earnings growth, Taketo Yamate, an analyst at Credit Suisse, said in a report dated April 12.
“The Nikkei 225 is not functioning as an index reflecting the overall market,” said Tatsushi Maeno, head of investment at PineBridge, which manages about $11 billion globally. “The way the index is calculated has to be changed.”