Sector performance: Topix to end of August 2012

by SR on September 4, 2012

Topix sector performance year-to-date in 2012

A game of two halves

With two-thirds of the year gone, I thought we should take another look at the performance of the difference industries or sectors that make up Topix, of which there are 33 in total. Conclusion: Machinery looks like a classic oversold sector. Here we have a choice of stocks geared to (variously) emerging markets demand, the semiconductor cycle and auto capex, yet despite these promising fundamentals (plenty of potential growth) the machinery sector as a whole has underperformed Topix (see chart above).

I can’t believe that global machinery demand is going to take another massive step down over the next six months. We already know Europe and China are weak, so in theory the bad news should be limited. The only thing that would keep me from piling into it is the extreme nervousness that investors have displayed during the recent earnings season, punishing stocks in which the bad news ‘should’ already have been known. Still, I’m waiting for a time to buy. Perhaps Komatsu, down 14.4% up to 31 August (see below), is the stock to go for. With US construction showing signs of life this could see a recovery into the end of the year, especially if you think that China will not get materially worse.

Japan machinery stocks performance year-to-date to 31 August 2012

The run up to late March 2012

So, looking back over the year so far, the top 3 sectors were Real Estate (+25.1%), Food (+15.3%) and Other Financing (+14.7%). The worst 3 performers were Pulp & Paper (-31.6%), Marine Transport (-25.7%) and Iron and Steel (-23.5%). Transport Equipment – which includes autos – was the sixth best performer, rising 9.9% up to the end of August 2012 compared to an increase of just 0.4% for the Topix index. Rubber Products, a category that is dominated by Bridgestone and other tyre companies, rose 6% over the same period. Machinery fell 5.9%. What strikes me though is the dramatic contrast in the market’s behaviour before the peak of Topix (27 March 2012) and after that date.

From the beginning of 2012 to the end of March, the market had a surging run of 19.7%. The clear winner in terms of performance was the Securities sector, which includes brokerages such as Nomura and Daiwa. These would represent a leveraged play on the rise of the Japanese market and presumably this line of thought caused the 56.4% increase in this sector. Insurance also had a good start, rising 36.7%, perhaps just as a relief rally after the awfulness of 2011. Real Estate up 35.5% – I have no idea why, please let me know if you’re knowledgeable about this sector – then we have Transport Equipment up 34.4%.

Topix sector performance from start of 2012 to March peak

The post-March slump: switching into defensives

After March everything goes badly wrong. The best performing sectors between 27 March and 31 August are the classic defensives of Food (-0.4%) and Pharma (-0.7%), with Land Transport (-0.9%) in fourth place. Third was Information & Communication products, which I think has held up relatively well merely because it was the worst-performing sector up to the peak in the market and therefore didn’t get as frothy as some of the other sectors. It did dip as the market fell, but has since recovered in away that the index has not. The worst performers from 27 March to 31 August are the same three sectors that were mentioned above: Pulp & Paper, Iron and Steel and Marine transport. Over that same period the Baltic Dry Index (BDI) fell by 23.3% and the capacity glut in shipping has been commented upon widely.

Topix sector performance from March peak to end of August 2012

Auto stock performance

What about the car makers? If we take Toyota, by far the best performer among the Japanese OEMs, the share price rose 20.7% from the end of 2011 to 31 August 2012 (the next best was Nissan at +5.5%). Given the sheer size of Toyota’s stock it is not surprising that despite horrible performances from Mazda (-30.9%), Yamaha (-30.4%) and Mitsubishi Motors (-19.8%) the Transport Equipment sector has managed to rise 9.9% over the same period. But again here we see a similar pattern, with Toyota rising 40.4% from 30 December 2011 to 27 March 2012 – although Honda was up 39.3% – then falling 14% between 27 March and 31 Augus (Honda was far worse, at -24.4% over the same period) as shown below. The Transport Equipment sector as a whole rose 34.4% up to the March peak.

After that, the picture changes. From 27 March to 31 August, Toyota fell 14% – the best of the Japanese OEMs – while at the other end of the scale Yamaha fell 39.8% after announcing disappointing results in May 2012 and Mazda fell 33.8% due to its high exposure to Europe. While Topix has fallen 16.1% since the peak of March, Transport Equipment has fared slightly worse at -18.2%.
Global auto OEM stock performance from March 2012 Topix peak to end of August 2012

I do scratch my head a little over the performance of Toyota, which is having a great year. Certainly the forex must have had an impact. As the graphic below shows, the yen soared from a low of 76.19 at the start of February 2012 to a high of 83.72 on 20 March. Given than a 1-yen shift in the yen-dollar rate affects Toyota’s operating profit by 35-40 billion yen, the volatility in the share price becomes a little easier to understand.

Japanese yen to US dollar exchange rate

Methodology

A note on our calculations: the figures in the charts show the percentage change in the daily closing price from the beginning of the specified period to the end. For example, the Tokyo Stock Exchange’s First Section index (Topix) was 728.61 on the last trading day of 2011, which was 30 December. At the close on 31 August 2012 the index was 731.64, a change of +0.4%, as shown in the chart at the top of the page. The highest closing price for Topix in 2012 so far was 872.42 on 27 March, so the change from the end of 2011 to that peak value was +19.7%, as shown in the third chart on this page. If we measure from that same peak level of 872.42, the change in the index to the end of August close of 731.64 was -16.1%, shown in the fourth chart.

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