Question: There's a Big New Investor in Stock Markets: The State
The Bank of Japan and Chinese state-owned funds are now big shareholders in roughly a third of listed firms in their respective markets
Two of the world's most important stock markets have a big new investor: the state.
About 30% of all the companies in Japan's three main equity indexes now count the country's central bank as one of their top 10 shareholders, according to a Wall Street Journal analysis of data as of the end of September. Six years ago, the Bank of Japan's presence in the market was trivial.
In China, two major state-owned investment funds that are part of the so-called national team have become top 10 shareholders in 39% of listed companies over the past year, according to UBS, which analyzed shareholdings as of the end of September.
The data are a stunning benchmark for the role governments now play in markets after nearly a decade of heavy intervention. Public pension funds and sovereign-wealth funds have long been big holders of stocks. But the new wave of state buying is unique in that it is aimed primarily at propping up markets and economies.
Traders say the buying distorts stock values as investors build strategies around government actions rather than company fundamentals. The state's indiscriminate purchases also might reduce pressure on managements to fix problems that otherwise could weigh on their stock. And then there is the question of how governments will ultimately wind down their holdings, a concern that some say could be deterring investors with a longer-term outlook.
"In the parlance of the gambling community, the Bank of Japan has become the biggest ‘whale' in the market," Mark Mobius, executive chairman of the Templeton Emerging Markets Group at Franklin Templeton Investments, said in a recent note. "Many investors have become increasingly focused not on company fundamentals but on the BOJ's daily purchases."
The state-backed stock purchases by Japan and China add to an already enormous pile of holdings at central banks around the world.
The Federal Reserve, the European Central Bank and the BOJ own trillions of dollars of government bonds that they have acquired to push interest rates down. The ECB and Bank of England also have begun buying up corporate bonds in hopes of spurring more investment. The Swiss National Bank holds about $500 billion of mostly foreign bonds and over $100 billion in foreign equities that it has accumulated in an effort to weaken the persistently strong franc.
The BOJ started buying exchange-traded funds that track equity indexes in December 2010. In July, it boosted its target to roughly ¥6 trillion ($53 billion) worth of ETFs each year. Its holdings had swelled to about ¥13 trillion by late November-equal to around two-thirds of the money held by all Japanese ETFs, according to a Journal analysis of data from the central bank and Morningstar.
While the BOJ doesn't disclose which ETFs it has bought, it is possible to estimate its effective holdings in individual companies by allocating its total ETF holdings across Japan's three main indexes-the Nikkei 225, the Topix and the JPX-Nikkei 400-and then assuming it owns shares according to the weighting of each company in that index, in line with typical ETF practice.
The result is only an approximation, in part because the BOJ has bought ETFs at various points in time, when the market weighting of the index-linked ETFs might have differed.
Still, analysts who reviewed the Journal's methodology said it does give a sense of the scale. The BOJ could effectively be a large shareholder for companies like Mitsumi Electric Co., with an estimated 16.8% stake; Uniqlo owner Fast Retailing Co., with 13.5%; and industrial-robot manufacturer Fanuc Corp., with roughly 8.5%.
"For the BOJ to become a major shareholder of listed companies is against the principle of the marketplace, so they should stop," Tadashi Yanai, chief executive of Fast Retailing, said in an interview. "The mistake they are making is they think they can control the market."
When asked for comment, a BOJ official referred to remarks made by BOJ Governor Haruhiko Kuroda last month, in which the central-bank chief said he doubted there was any significant market distortion due to the stock ETF purchases. The official declined to comment further.
Companies in which Japan's central bank effectively has a large stake tend to have higher share prices relative to their earnings, according to Shingo Ide, chief equity strategist at think tank NLI Research Institute. The price-to-earnings ratio of the companies in which the BOJ effectively is buying 10% of the shares available for trading was eight points higher on average than their industry's median as of late October, he said.
"I wish it wasn't happening, but it's happening," said Robert Sharpe, who manages an international equity fund at Milwaukee-based Heartland Advisors. Mr. Sharpe said trading could become more difficult as the number of available shares shrinks due to the BOJ purchases.
In China, Central Huijin Asset Management, part of China's main sovereign-wealth fund, and China Securities Finance Corp., which provides margin financing to the country's brokerages, have been buying shares to support Chinese stock markets since the rout during the summer of 2015.
Collectively, those firms-along with newly forged Wutongshu Investment Platform, a subsidiary of China's foreign-exchange regulator-were among the biggest 10 shareholders in 1,154 listed Chinese companies by the end of September, according to UBS Securities.
Any suggestion that the national team is active can produce a frenzy of buying among mom-and-pop investors, said Sean Taylor, chief investment officer for Asia-Pacific at Deutsche Asset Management.
Central Huijin Asset Management and China Securities Finance declined to comment.
Others say the national team's presence has made the market more dull. Big state-backed funds have been selling down blue-chip shareholdings whenever the market rallies for a few sessions in a row, then buying them back if any selloff steepens. The main Shanghai market has traded in a much narrower range this year than in 2015, and volumes of stock traded in Shanghai and Shenzhen are now around a quarter of the peak reached in the summer of 2015.
"The most important thing for China is that they forget the market for a while and do what's right in terms of regulation," said Binay Chandgothia, a portfolio manager at Principal Global Investors who is based in Hong Kong. "Money will automatically come in."
1. What percentage of firms listed in Japan's three main equity indexes count Japan's central bank as on of their top 10 shareholders? What percentage of listed firms count China's two major state-owned investment funds among their top 10 shareholders?
2. Will the government owning a large position in a firm push the firm to be more long-term in its thinking and decision making? Why or why not?
3. How can government ownership of firms distort the stock market? Are such distortions a problem or an opportunity? Explain.
4. How do the distortions differ if the government buys corporate bonds instead of shares of a company?
5. Does a government buying index funds create less distortions than buying individual stocks? Why or why not?