TOPIX sector performance in 2012: winners and losers

by SR on January 9, 2013

Performance of TOPIX vs S&P 500 in 2012

The four phases of TOPIX in 2012

Before we charge off into 2013 I’m going to take a brief look at which sectors of the Japan market performed well in 2012. Cycles are important drivers of all stock markets and in Japan investment themes are significant albeit often short-lived drivers of share price performance. Looking at sector moves can help us to identify those themes and take a view on which ones are played out, which ones may still have legs and which have yet to emerge.

Let’s start by looking at the performance of the TOPIX index itself, which rose 18% in CY2012 from 728.61 on 30 December 2011 (the last trading day of the year) to 859.8 on 28 December 2012. There were four clear behavioural phases to the Japanese market during 2012.

  • Rally. From the start of the year to 27 March the index rose by 19.7% from 728.61 to 872.42. This rally had actually begun on 24 November 2011, when the index hit a low of 706.08, so from the trough of the rally to the index rose by 23.6%.
  • Crash. The rally up to the end of March 2012 was followed by a significant pullback. From the high of 872.42 the market plunged to 695.51 (4 June 2012), a fall of 20.3% over just 46 trading days.
  • Consolidation. From this low point of 695.51 the market rebounded sharply, rising to 778.7 on 4 July 2012. That was an increase of 12%, a decent move but one that did not continue. Between July and mid-November 2012 the Tokyo market oscillated up and down with a gradually decreasing amplitude, going nowhere in net terms.
  • Recovery. On 14 November 2012 the index was 722.41, but by 28 December 2012 it had leaped 19% to 859.8 in just 30 trading days. This was a decisive breakout from the 4-month sawtooth pattern of consolidation that had formed between the beginning of July and mid-November 2012.

TOPIX performance in 2012

It’s interesting to contrast this to the performance of the S&P 500 index over the same period. The S&P500 rose from 1,257.6 on 30 December 2011 to 1,426.19 on 31 December 2012, an increase of 13.4%. The S&P500 did not rise as much as TOPIX but it developed with a more confident “higher highs and higher lows” motion than that of the Japanese market index, which described a kind of U-shape between March 2012 and December 2012.

Performance of TOPIX vs S&P 500 in 2012

I’m not going to delve into the causes of the pattern drawn by TOPIX in 2012, except to note that the European crisis, the continued softness in the Chinese economy, the US presidential elections and the fiscal cliff issue all no doubt played a part. In addition I can’t help thinking the role of the currency may have been significant. The chart below juxtaposes the Japanese yen/US dollar rate and the TOPIX index in 2012: you may draw your own conclusions…

TOPIX vs Japanese yen in 2012

Performance by sector

The TOPIX index is composed of the 1698 domestic stocks (as of 28 December 2012) listed on the first section of the Tokyo Stock Exchange. It does not include any of the stocks in the Mothers or JASDAQ indices. These stocks are further categorised into 33 different industries or sectors. For the whole of the year (2012) the performance by sector looked like this (click on the chart for a larger, clearer image).

TOPIX performance by sector in 2012

However, if we break the performance out by phase, we get a more nuanced picture.

Phase 1: Rally

During the first phase of the year, which was the sharp increase in the TOPIX index up to the end of March 2012 (+19.7%), the top two sectors were obvious beneficiaries of higher stock market volumes and higher share prices: Securities & Commodity Futures (56.4%) and Insurance (+36.7%), the constituent companies of which carry large portfolios of stocks. Then came Real Estate, up 35.5%. Transport Equipment in 4th place (+34.4%) was buoyed by excellent prospects for Japanese auto and auto parts stocks (especially the Toyota group) in 2012 after the devastation of the North Japan earthquake of March 2011 that brought the industry to a halt for several months. At the bottom we had the defensive and domestic stocks such as Land Transport, Fishery Agriculture & Forestry and Pulp & Paper.
TOPIX sector performance during early 2012 rally

Phase 2: Crash

During the short-lived but sharp pullback that followed, TOPIX fell 20.3%. Sector performance panned out as one might expect: market participants flocked to defensives and sold off the sectors with tight gearing to the market itself. At the top end Retail (-7.9%), Foods (-9%) and Pharmaceutical (-10.4%) and Land Transport (-11.4%) significantly outperformed the main index. At the other end, Securities & Commodity Futures plummeted 34.8%, while Insurance was down 30.9%. Cyclicals such as Machinery (-22.8%) and Transport Equipment (-22.2%) fared much better and were close to the performance of the main index.

TOPIX sector performance during March to June 2012 crash

Phase 3: Consolidation

From June to mid-November 2012 the TOPIX index moved only +3.9% but sector-to-sector performance varied wildly. The Real Estate sector – driven by solid results at real estate companies and a recovery trend (i.e. smaller declines) in land prices – posted a 34.2% gain from 4 June to 14 November 2012, a solid 8 percentage points ahead of the Other Financing sector. I was surprised to see Securities & Commodity Futures rise 22.1% given that the market as a whole went nowhere and given that volumes remained so weak. Still, a flat market has to be perceived as less bad than the plunging market that preceded it so maybe this was a relief rally for brokerages. The 12.6% increase in Construction during this period was likely driven by awareness of reconstruction efforts in Northern Japan following last year’s earthquake. Marine Transport (-23.6%) took bottom place, followed by Air Transportation (-22.4%) and Electricity Power & Gas (-16.2%).

TOPIX sector performance during July to November 2012 consolidation

Phase 4: Recovery

The final joyous ramp of the market was led by Securities & Commodity Futures – understandable – but also by Iron & Steel (+35.7%) and Marine Transport (+34.6%). I don’t have a pat explanation for the big move by the Marine Transport sector, especially given that the Baltic Dry Index (used here as a proxy for shipping services) hasn’t done much recently. The BDI did rise sharply between mid-September and late October but by Christmas the BDI was back down to September lows. Transport Equipment’s strong showing is easy enough to understand if we bear in mind the weakening of the yen, which is a major factor for Toyota, Honda and others such as Fuji Heavy and (against the Euro) Mazda. Good to note that Machinery (+26.6%) had a solid ending to a largely difficult year. Interesting also to see Rubber Products, Pulp & Paper and even Glass & Ceramic outperforming the index in the last push of 2012.

TOPIX sector performance during November to December 2012 recovery

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