The US$48 billion sell-off that sent Japanese stocks into bear territory

Tokyo

JAPANESE stocks tumbled into a bear market, buffeted by the biggest foreign investor exodus in three decades. UBS Wealth Management says the worst may be yet to come.

Traders should brace for a "cold winter," said Toru Ibayashi, head of Japanese equities at the money manager, after the benchmark Topix index slid 2.5 per cent on Thursday to take its decline from a January high to 21 per cent.

Overseas investors have dumped about US$48 billion in the country's stocks so far this year, the most since 1987, the year of Wall Street's famous Black Monday market crash. The Topix is down 9 per cent this month alone, set for its worst December performance since 1959, as Japanese equities get sucked into a global market sell-off spurred by concern about the US-China trade war and central banks' tightening of monetary policy.

While that's sent valuations on the benchmark gauge to their lowest since 2012, Mr Ibayashi of UBS says it's too early to jump back into the market.

"Japanese equities will suffer from global investors' selling pressure until March," Mr Ibayashi said in a phone interview. He pointed to the need to know the outcome of trade negotiations between the US and China that are set to run until the start of that month. "We are near the bottom but we can see some downside left. Be patient until March."

The country's stock market, so often swayed by external events, is in that position again. Investors say that because the fall was due to factors such as the trade uncertainty, not domestic corporate profits, the market is unlikely to rebound until they're resolved.

"There isn't much of a Japan-specific reason to this," said Naoki Murakami, a Tokyo-based market strategist at AllianceBernstein Japan Ltd. "It's not as if the foreign selling indicates a disappointment towards Japan." Mr Murakami says that one of the things that could help Japanese equities is if the US Federal Reserve moderates its stance on interest-rate increases. A dovish Fed could bolster US equities and in turn rekindle foreign appetite for Japanese stocks.

Nader Naeimi of AMP Capital Investors Ltd takes the same position. He needs to see confidence restored in other markets before he'll buy back into Japan.

This year's performance and foreign selling is a stark contrast to 2013, when foreigners piled into the Japanese stock market on enthusiasm about Prime Minister Shinzo Abe's plans to stimulate the economy and kickstart inflation.

"Foreigners are liquidating the positions they've built up during the days of the Abenomics-driven market," said Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management Ltd. Japan has entered a bear market despite record stock-market purchases by the Bank of Japan. The BOJ has bought 6.2 trillion yen in exchange-traded funds tracking the nation's shares this year through Dec 19, exceeding its annual target for 6 trillion yen.

The Topix trades at 12 times estimated earnings, the lowest since September 2012. The market is now so cheap that it wouldn't be strange to see some buyers, according to Mr Matsumoto. But for foreigners to return en masse like they did in 2013, they're going to need a more convincing reason, he said.

"They'll come back when they're able to picture another growth story for Japan," he said. BLOOMBERG